Legislature(2007 - 2008)CAPITOL 120
03/10/2008 01:00 PM House JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| HB410 | |
| HB255 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 255 | TELECONFERENCED | |
| *+ | HB 410 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 410 - OIL & GAS LEASE TERMS 1:20:03 PM CHAIR RAMRAS announced that the first order of business would be HOUSE BILL NO. 410, "An Act requiring state oil and gas leases to be construed in favor of the state and against the person challenging the state's interpretation of the lease." 1:21:32 PM The committee took an at-ease from 1:21 p.m. to 1:24 p.m. 1:24:16 PM REPRESENTATIVE GRUENBERG, speaking as the sponsor, relayed that HB 410 will require that for state oil and gas leases any ambiguity in the statutes be interpreted in favor of the state. This concept is based on a clause in the form lease used by the Alabama Department of Conservation and Natural Resources. This legislation is based upon the November 2007 case, ExxonMobil Corporation v. Alabama Department of Conservation and Natural Resources, in which an attorney revised the standard lease form from one that was more favorable to the lessee to one that is more favorable to the state. In doing so, a uniquely state- friendly lease was devised in an effort to maximize royalty interest for the state. The clause at issue in the aforementioned case was paragraph 27, which specifies "[i]n case of ambiguity, this lease always shall be construed in favor of the LESSOR and against the LESSEE." A number of the justices in the aforementioned case believed that certain clauses weren't ambiguous, and therefore didn't have to reach the construction according to the clause. Furthermore, others felt that paragraph 27 rendered the issue clear. In fact, that clause alone caused a number of justices on the Alabama Supreme Court to rule in favor of the state, which was worth millions of dollars to the State of Alabama. The current lease form contains a provision that says, "This lease is to be interpreted in accordance with the rules applicable to the interpretation of contracts made in the State of Alaska." He noted that a number of cases in Alaska specify that when there is a contract of adhesion, a party that drafts a contract on a take-it or leave- it basis, it's construed more strictly against the drafter. This [legislation] would change the interpretation of oil and gas leases, such that it would require that the ambiguous language be construed strictly in favor of the state and against the person/entity challenging the state's interpretation. 1:29:54 PM KURTIS GIBSON, Deputy Director, Division of Oil & Gas, Department of Natural Resources (DNR), in response to Representative Gruenberg, specified, speaking on behalf of the administration, that the Division of Oil & Gas doesn't oppose HB 410. He characterized the legislation as primarily a legal issue regarding how ambiguity in the lease itself should be reviewed by the courts. In further response to Representative Gruenberg, Mr. Gibson deferred to the Department of Law (DOL) regarding whether this could potentially make a difference in litigation for the State of Alaska. However, he offered his opinion that to the extent HB 410 tilts the playing field in favor of the state, it would favor the state. He noted that the aforementioned is his unqualified and nonlegal opinion. REPRESENTATIVE GRUENBERG asked if there are cases in which lessees feel that certain clauses are ambiguous and argue with the state, such that this would come into play. MR. GIBSON replied yes, there are certainly times in which there are ambiguities with regard to the lease form. To the extent that those ambiguities would be ruled in favor of the state, it would appear to benefit the state. CHAIR RAMRAS inquired as to the meaning of ambiguous in the context of HB 410. MR. GIBSON reiterated that this is primarily a legal issue that more or less deals with the legal interpretation of contracts, and thus is probably best answered by DOL. As the state's representative in many of these contractual issues, the Division of Oil & Gas would certainly favor anything that would improve the state's legal standing in the event of an ambiguity. Mr. Gibson related his understanding that HB 410 doesn't directly affect the lease forms as currently written. He characterized the legislation as a prospective change. In further response to Chair Ramras, Mr. Gibson clarified that from the standpoint of the Division of Oil & Gas, the administration supports HB 410. He mentioned his understanding that DOL supports HB 410, although he said he isn't qualified to speak on behalf of DOL. 1:33:36 PM REPRESENTATIVE HOLMES offered her understanding that the earlier mentioned case in Alabama will likely be interpreted similarly in Alaska. She then referred to page 10 of the Supreme Court of Alabama's document, which says "When a contract is subject to two reasonable but differing interpretations, it is ambiguous." On page 19 of the same document it says "A term in a contract is ambiguous only if, when given the context, the term can reasonably be open to different interpretations by people of ordinary intelligence." She opined that the aforementioned is in line with her understanding that a situation in which two reasonable interpretations of a section of a contract would be when it's considered ambiguous. CHAIR RAMRAS surmised that it sounds like a difference of opinion. Therefore, he questioned when a difference of opinion is considered to be ambiguous under a legal definition. REPRESENTATIVE GRUENBERG informed the committee that the Alaska Supreme Court has interpreted the term "ambiguous" twice. One of those cases, Williams v. Crawford 982 Pacific 2d 250 Alaska 1999, specifies the following: "A contract is ambiguous only if taken as a whole it is reasonably subject to different interpretations." Representative Gruenberg surmised that a contract or a clause could be considered ambiguous or not. However, since it would be reasonable for there to be different interpretations, the court would first have to find that each interpretation was reasonable. If there are two or more different reasonable interpretations, then the clause could be held to be ambiguous. One of the 9th Circuit Court of Appeals cases, Roberts v. Continental Insurance Company, says a policy provision is ambiguous if susceptible to two reasonable interpretations by a court. 1:39:57 PM REPRESENTATIVE GRUENBERG referred to Amendment 1, and explained that it is intended to address a typographical error in the bill; Amendment 1 read [original punctuation provided]: Line 10 - After "Section" - Delete "2"; Insert "1" 1:41:07 PM REPRESENTATIVE GRUENBERG relayed that when reading [the Alabama decision] it seemed the provision was very protective of the state and might be worth reviewing, which ultimately resulted in the introduction of HB 410. 1:43:23 PM JEFF LANDRY, Senior Assistant Attorney General, Oil, Gas & Mining Section, Civil Division (Anchorage), Department of Law, explained that in this context ambiguous would be a term or phrase in the lease that has two different but reasonable interpretations. In such a situation, the court would have to determine which party would prevail. Mr. Landry characterized this as a very subtle area of the law in which DOL believes Alaska's courts generally do a good job. If there are ambiguities in the lease, normally the parties would turn to extrinsic evidence to try to determine and ascertain the expectations and intentions of the parties. For instance, there could be contemporaneous communications between the parties when the contract was entered into. It could also be course of conduct by the parties. The court would weigh that evidence and determine how to interpret that particular term or phrase in the lease. REPRESENTATIVE HOLMES, drawing from her experience as a contract attorney, commented that the concept of ambiguity is fairly common in contract law. Representative Holmes clarified that just because two parties have differing views as to what something means, it doesn't make it an ambiguous. In order to be ambiguous, the court must find that both are reasonable interpretations. She asked how, in the absence of the provisions proposed in HB 410, the courts are interpreting the lease provisions now. MR. LANDRY recalled that the last oil and gas case in which the court opined on ambiguous terminology was the Amerada Hess litigation. 1:48:19 PM REPRESENTATIVE HOLMES inquired as to what the courts might do now without the proposed section. MR. LANDRY acknowledged that the common law rule is that the ambiguous terms would normally be construed against the drafter. The aforementioned wasn't an issue in the Amerada Hess case because the lease form was conducted through a regulatory process. Therefore, the reasoning was that the public, and presumably the oil companies, already had input into the lease form. Additionally, Judge Carpeneti as well as others were aware that the lease form was written by the oil companies and folded into a regulatory process. The subsequent lease forms have all been written by the Department of Natural Resources (DNR), and thus the common law would call for those leases to be interpreted against the drafter, the state. However, the Alaska Supreme Court may not follow that rule. He opined that if there was an ambiguous term, the court would look to extrinsic evidence and review the course of conduct of the parties, contemporaneous statements by the drafters, etcetera. He reiterated that this is a very subtle area of the law and the Alaska courts are very attuned to these issues, particularly with respect to the state's oil and gas leases. Mr. Landry said, "So, we don't really know what would happen." This proposed legislation would upset the common law and would have an impact on how the court would look at extrinsic evidence. 1:51:07 PM REPRESENTATIVE GRUENBERG asked if the passage of HB 410 would simplify and perhaps prevent a lot of lengthy and expensive litigation on these points of contract interpretation. MR. LANDRY answered that he wasn't sure. He noted that [HB 410] would change the common law. To the extent possible, DNR, he opined, should try to sweep ambiguous terms out of its leases. Mr. Landry related his assumption that the standard proposed in HB 410 is intended to only apply to the court system. He then opined that the legislation almost forces the commissioner to interpret ambiguous language in favor of the state, regardless of the evidence. The aforementioned may be problematic, he remarked. CHAIR RAMRAS concurred. MR. LANDRY, in response to Representative Gruenberg, said that he read the Alabama case, which doesn't involve statute but rather involves Alabama writing an entirely new state-friendly oil and gas lease. The aforementioned lease has similar language to the proposed statute in HB 410 embedded in the lease form. Mr. Landry related his understanding that Alabama used a prospective application. In further response to Representative Gruenberg, Mr. Landry concurred that the justices that construed the clause in the contract in the Alabama case didn't find it to be problematic, but rather outcome determinative. He remarked that it was the law of Alabama. REPRESENTATIVE GRUENBERG asked if there would've been a significant difference in the result in the Alabama case had it been statutory language as opposed to a clause in the lease. He questioned the difference; "wouldn't they have used it the same way?" MR. LANDRY said he isn't particularly familiar with the Alabama courts. REPRESENTATIVE GRUENBERG asked if there would make any difference to Alaska courts whether the language is embedded in the lease or a governing statute. MR. LANDRY responded, "Probably so." 1:54:37 PM REPRESENTATIVE DAHLSTROM asked what engendered the introduction of HB 410: something in the past or a possibility in the future. REPRESENTATIVE GRUENBERG specified that he introduced the legislation due to the possibility of [problems] in the future. Representative Gruenberg explained that he came across the Alabama case, which seemed to be an insightful way of protecting the state's interests and a unique solution to the problem. After not being able to correspond with the commissioner [in a timely fashion], Representative Gruenberg said that he thought it could be put into Alaska law. REPRESENTATIVE GRUENBERG, in response to Chair Ramras, confirmed that HB 410 would favor the state. In regard to concerns that the legislation may dissuade [oil & gas] clients, Representative Gruenberg pointed out that in Alabama that wasn't the case when the clause was in place. 1:58:13 PM REPRESENTATIVE DAHLSTROM inquired as to the sponsor's thoughts regarding Mr. Landry's comment that HB 410 is problematic. She then asked if it would be fair to institute this provision in family law court. REPRESENTATIVE GRUENBERG acknowledged that the term problematic caught his ear, which is why he inquired as to Mr. Landry's thoughts as to whether the Alabama Supreme Court justices who found the clauses ambiguous found it to be problematic. Representative Gruenberg opined that the justices didn't find the clause problematic as the clause was applied. The justices' opinions were short, succinct, and outcome determinative. Representative Gruenberg said he understood Mr. Landry's answer to not dispute his answer. In further response to Representative Dahlstrom, Representative Gruenberg informed the committee that similar clauses are sometimes used in family law contracts, wills, and trusts. These are in terrorem clauses in which in a will "if you dispute my interpretation of what I wrote, you get nothing under the will." Such clauses have been upheld, and thus there is precedent in the law for such. He then recalled that some of [these clauses] are included in family law contracts. He explained that factual background in family law causes is usually not the same, although it may sometimes be the same in pre-marital contracts. He related his understanding that in family law these clauses apply strictly if the marriage is very short, but less strictly if the marriage continues. Therefore, if one challenges a contract after a short marriage, he/she loses. 2:02:03 PM REPRESENTATIVE HOLMES highlighted that this clause wouldn't determine the outcome of all oil and gas lease challenges. This clause, she opined, would only come into effect in a situation in which the outcome of the challenge hinged on a term, phrase, or section being considered ambiguous. Since the parties in oil and gas leases are what's referred to as "sophisticated parties," the chances of having ambiguous terms is limited. "This is not outcome determinative for all lease challenges, it would only be outcome determinative on specific points that appear not to come up very often," she pointed out. REPRESENTATIVE DAHLSTROM questioned then whether this legislation proposes a law that's not really necessary. REPRESENTATIVE HOLMES said that she's a bit troubled as there are a lot of questions as to how a term would be determined to be ambiguous. However, she opined that it's helpful to provide clarity to contract law. 2:05:56 PM REPRESENTATIVE GRUENBERG informed the committee that the goal of the transactional attorney as opposed to a litigator is to keep the clients out of court and to provide certainty and clarity in the drafting of the agreement. The fact that this has arisen only once shouldn't make the difference in this case because Alaska is a young state and the large contracts are relatively recent in development. Representative Gruenberg pointed out that there aren't many of these cases because in most cases in the Lower 48 oil and gas development doesn't occur between the sovereign and the developer as it's mostly private parties who own subsurface rights. However, when it's the sovereign resources that are at stake it's a form of public land law, and therefore the interests at stake are a bit different than they would be in other types of oil and gas leases. Although there may not be many of these cases, if the state can be saved from litigation and have certainty in its favor in even one case, then the precaution is well worth it because the stakes are so large in each case. 2:08:30 PM CHAIR RAMRAS, after ascertaining that no one else wished to testify, closed public testimony on HB 410. 2:08:40 PM REPRESENTATIVE GRUENBERG made a motion to adopt Amendment 1 [text provided previously]. There being no objection, Amendment 1 was adopted. CHAIR RAMRAS relayed that HB 410, as amended, would be set aside.
| Document Name | Date/Time | Subjects |
|---|