North Dakota Reminds Negotiators: Be Careful What You Say

Do you think that what you say when negotiating a mineral lease does not matter once the agreement is inked and contains boilerplate language declaring it to "supersede all prior negotiations" and "be the complete agreement between the parties"? Think again. The North Dakota Supreme Court recently reminded negotiators that what you say does matter and may allow for rescission of a lease.[1]

This issue came before the North Dakota courts when Golden Eye Resources ("GER") sought to quiet title in certain oil and gas leases in Williams County, leases that the mineral owners claimed had been cancelled. The minerals owners contend they made it clear at the outset of negotiations that they would only lease to a company which could drill and operate the wells itself. They also contend that GER made representations to this effect during negotiations and thus, despite being approached by another potential lessee offering more favorable financial terms, the mineral owners entered into leases with GER.

When the mineral owners learned that another company had obtained a drilling permit in a drilling unit encompassing some of their minerals, and that GER only has a 19% interest in the spacing units where their minerals were located, they sent GER a notice of rescission. The notice sought to rescind the lease for fraud in the inducement. The matter escalated when, a month later, GER entered into a Participation Agreement, assigning a 58.32% working interest in the drilling unit to another company. The mineral owners then sent a notice of cancellation of the leases, alleging breach of the anti-assignment provisions.

GER responded by suing to quiet title to the leased interests, and while the district court was swayed, the North Dakota Supreme Court was not. On appeal, the Supreme Court held that the district court erred in granting summary judgment dismissing the mineral owners' claims they were fraudulently induced into signing the leases by GER's alleged misrepresentations.

As a threshold matter, the Court addressed whether evidence of the parties negotiations leading up to execution of the leases was admissible despite the fact that some purported representations conflicted with certain lease terms; or whether the parol evidence rule barred consideration of such negotiations.[2] Holding that the parol evidence rule does not apply where one of the parties alleges fraud as a defense to the validity of the contract, the Court found it to be immaterial...