To arbitrate or not to arbitrate: that is the question

By: Jeffrey K. Lewis, Esq., Program Coordinator OSU Income Tax Schools & ANR Extension

One of the core principles of the American legal system is that people are free to enter into contracts and negotiate those terms as they see fit.  But sometimes the law prohibits certain rights from being “signed away.”  The interplay between state and federal law and the ability to contract freely can be a complex and overlapping web of regulations, laws, precedent, and even morals.  Recently, the Ohio Supreme Court ruled on a case that demonstrates the complex relationship between Ohio law and the ability of parties to negotiate certain terms within an oil and gas lease.     

The Background.  Ascent Resources-Utica, L.L.C. (“Defendant”) acquired leases to the oil and gas rights of farmland located in Jefferson County, Ohio allowing it to physically occupy the land which included the right to explore the land for oil and gas, construct wells, erect telephone lines, powerlines, and pipelines, and to build roads.  The leases also had a primary and secondary term language that specified that the leases would terminate after five years unless a well is producing oil or gas or unless Defendant had commenced drilling operations within 90 days of the expiration of the five-year term. 

After five years had passed, the owners of the farmland in Jefferson County (“Plaintiffs”) filed a lawsuit for declaratory judgment asking the Jefferson County Court of Common Pleas to find that the oil and gas leases had expired because of Defendant’s failure to produce oil or gas or to commence drilling within 90 days.  Defendant counterclaimed that the leases had not expired because it had obtained permits to drill wells on the land and had begun constructing those wells before the expiration of the leases.  Defendant also moved to stay the lawsuit, asserting that arbitration was the proper mechanism to determine whether the leases had expired, not a court. 

What is Arbitration and is it Legal?  Arbitration is a method of resolving disputes, outside of the court system, in which two contracting parties agree to settle a dispute using an independent, impartial third party (the “arbitrator”).  Arbitration usually involves presenting evidence and arguments to the arbitrator, who will then decide how the dispute should be settled.  Arbitration can be a quicker, less burdensome method of resolving a dispute. Because of this, parties to a contract will often agree to forgo their right to sue in a court of law, and instead, abide by any arbitration decision.   

Ohio law also recognizes the rights of parties to agree to use arbitration, rather than a court, to settle a dispute.  Ohio Revised Code § 2711.01(A) provides that “[a] provision in any written contract, except as provided in [§ 2711.01(B)], to settle by arbitration . . . shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract.”  What this means is that Ohio will enforce arbitration clauses contained within a contract, except in limited circumstances.  One of those limited circumstances arises in Ohio Revised Code § 2711.01(B).  § 2711.01(B)(1) provides that “[s]ections 2711.01 to 2711.16 . . . do not apply to controversies involving the title to or the possession of real estate . . .”  Because land and real estate are so precious, Ohio will not enforce an arbitration clause when the controversy involves the title to or possession of land or other real estate.  

To be or not to be?  After considering the above provisions of the Ohio Revised Code, the Jefferson County Court of Common Pleas denied Defendant’s request to stay the proceedings pending arbitration.  The Common Pleas Court concluded that Plaintiffs’ claims involved the title to or possession of land and therefore was exempt from arbitration under Ohio law.  However, the Seventh District Court of Appeals disagreed with the Jefferson County court.  The Seventh District reasoned that the controversy was not about title to land or possession of land, rather it was about the termination of a lease, and therefore should be subject to the arbitration provisions within the leases.   

The case eventually made its way to the Ohio Supreme Court, which was tasked with answering one single question: is an action seeking to determine that an oil and gas lease has expired by its own terms the type of controversy “involving the title to or the possession of real estate” so that the action is exempt from arbitration under Ohio Revised Code § 2711.01(B)(1)? 

The Ohio Supreme Court determined that yes, under Ohio law, an action seeking to determine whether an oil and gas lease has expired by its own terms is not subject to arbitration.  The Ohio Supreme Court reasoned that an oil and gas lease grants the lessee a property interest in the land and constitutes a title transaction because it affects title to real estate.  Additionally, the Ohio Supreme Court found that an oil and gas lease affects the possession of land because a lessee has a vested right to the possession of the land to the extent reasonably necessary to carry out the terms of the lease.  Lastly, the Ohio Supreme Court provided that if the conditions of the primary term or secondary term of an oil and gas lease are not met, then the lease terminates, and the property interest created by the oil and gas lease reverts back to the owner/lessor.  

In reaching its holding, the Ohio Supreme Court concluded that Plaintiffs’ lawsuit is exactly the type of controversy that involves the title to or the possession of real estate.  If Plaintiffs are successful, then it will quiet title to the farmland, remove the leases as encumbrances to the property, and restore the possession of the land to the Plaintiffs.  If Plaintiffs are unsuccessful, then title to the land will remain subject to the terms of the leases which affects the transferability of the land.  Additionally, the Ohio Supreme Court concluded that if Plaintiffs were unsuccessful then Defendant would have the continued right to possess and occupy the land.  Therefore, the Ohio Supreme Court found that Plaintiffs’ controversy regarding the termination of oil and gas leases is the type of controversy that is exempt from arbitration clauses under § 2711.01(B)(1). 

Conclusion.  Although Ohio recognizes the ability of parties to freely negotiate and enter into contracts, there are cases when the law will step in to override provisions of a contract.  The determination of title to and possession of real property is one of those instances.  Such a determination can have drastic and long-lasting effects on the property rights of individuals.  Therefore, as evidenced by this Ohio Supreme Court ruling, Ohio courts will not enforce an arbitration provision when the controversy is whether or not oil and gas leases have terminated.  To read more of the Ohio Supreme Court’s Opinion visit: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2022/2022-Ohio-869.pdf.

The Ag Law Harvest

By: Jeffrey K. Lewis, Attorney and Research Specialist. OSU Agriculture and Resource Law

Did you know that Hippopotamuses cannot swim?  It’s true.  When hippos submerge themselves underwater, they don’t swim back up to the surface, instead they walk along the bottom until they reach shallow water.  That is unless the hippo decides to chase you out of its territory, then it will gladly run, jump, and charge right at you. 

Like the hippo, this week’s Ag Law Harvest is a little territorial.  We bring you recent Ohio court decisions, a federal order allowing Colombian hippos to take the testimony of Ohio residents, and the Ohio Department of Agriculture’s directives as it ramps up its fight against Ohio’s newest pest.

Well, well, well.  A recent Ohio case demonstrated the complex issues a landowner can run into when dealing with an oil and gas lease.  The Plaintiff in this case owns land in Hebron, Ohio and brought suit against his neighbors and the Ohio Department of Taxation claiming that he was not the owner of a gas well located on his property or that he was responsible for paying taxes and maintaining the well under Ohio law.  The Hebron, Ohio property at issue in this case passed through many hands before becoming the property of the Plaintiff.  One of the prior owners was a man named William Taggart (“Taggart”).  As mentioned earlier, the property also has a gas well which was subject to an oil and gas lease.  The oil and gas lease passed to multiple parties and ended up with Taggart while he owned the Hebron property.  After having both the property and the oil and gas lease, Taggart deeded the property to Plaintiff’s parents which eventually passed onto Plaintiff.  Plaintiff argued that he is not the rightful owner of the well because the last person that was assigned the oil and gas lease was Taggart, making him the owner of the well.  The Fifth District Court of Appeals disagreed.  The court found that Plaintiff’s parents registered as owners of the well under Ohio Revised Code § 1509.31 which requires a person to register a well before they can operate it.  Further, the court determined that when the oil and gas lease was assigned to Taggart the rights of the landowner and the lessee merged, essentially making Taggart the only individual with any property interest in the well.  Relying on § 1509.31, the court found that when the entire interest of an oil and gas lease is assigned to the landowner, the landowner then becomes responsible for compliance with Chapter 1509 of the Ohio Revised Code.   Therefore, when the property passed to Plaintiff’s parents, they became the owners of the well and were responsible for making sure the well was in compliance with Chapter 1509.  Because this responsibility passed onto Plaintiff, the court found Plaintiff to be liable for the taxes and ensuring that the well is compliant with Ohio law.  The court also denied Plaintiff’s attempt to argue that Taggart was the responsible party because the oil and gas lease was still in effect due to the fact that Plaintiff’s neighbors use the gas well for domestic purposes.  The court found that the oil and gas lease had expired by its own terms, pursuant to the habendum clause contained within the lease.  A habendum clause essentially defines the property interests and rights that a lessee has.  The specific habendum clause in this case stated that the lease would terminate either within three years or when the well no longer produced oil and gas for commercial purposes.  The lease at issue was well beyond the three-year term and, as the court found, the lease expired under Taggart because the well no longer produced oil or gas for commercial purposes.  The use of the well for domestic purposes did not matter.  The Fifth District ultimately held that because Plaintiff could not produce any evidence to show that another party had an interest in the well, Plaintiff is ultimately responsible for the well.   

Amending a contract doesn’t always erase the past.  Two companies (“Plaintiffs”) recently filed suit against a former managing member (“Defendant”) for allegedly using business funds and assets for personal use during his time as managing member.  The primary issue in this case was whether or not an arbitration clause in the original operating agreement is enforceable after the operating agreement was amended to remove the arbitration clause.  Defendant’s alleged misconduct occurred while the original operating agreement was in effect.  The original operating agreement would require the parties to settle any disputes through the arbitration process and not through the court system.  However, shortly before filing suit, the original operating agreement was amended to remove the arbitration provision.  Plaintiffs filed suit against the Defendant arguing that the arbitration provision no longer applied because the operating agreement had been amended.  Defendant, however, argued that his alleged misconduct occurred while the original operating agreement was in effect and that the amended operating agreement could not apply retroactively forcing him to settle the dispute in a court rather than through arbitration.  The trial court, however, sided with the Plaintiffs and allowed the case to move forward.  Defendant appealed the trial court’s decision and the Ninth District Court of Appeals agreed with him.  The District Court found that the amended operating agreement did not expressly state any intention for the terms and conditions of the amended operating agreement to apply retroactively.  Further, the court held that Ohio law favors enforcing arbitration provisions within contracts and any doubts as to whether an arbitration clause applies should be resolved in favor of enforcing the arbitration clause.  The Ninth District reversed the trial court and found that the dispute of Defendant’s alleged misconduct should be resolved through arbitration.  

Animal advocates claim victory in pursuit of recognizing animals as legal persons.  A recent order issued by a federal district court in Ohio allows an attorney for Colombian Hippopotamuses to take the testimony of two expert witnesses residing in Ohio.  According to U.S. law, a witness may be compelled to give testimony in a foreign lawsuit if an “interested person” applies to a U.S. court asking that the testimony be taken.  The Animal Legal Defense Fund (“ALDF”) applied to the federal court on behalf of the plaintiffs, roughly 100 hippopotamuses, from a lawsuit currently pending in Colombia.  According to the ALDF, the lawsuit seeks to prevent the Colombian government from killing the hippos.  The interesting thing about this case is that hippos are not native to Colombia and were illegally imported into the country by drug kingpin Pablo Escobar.  After Escobar’s death the hippos escaped his property and relocated to Colombia’s Magdalena River and have reproduced at a rate that some say is unsustainable.  In Colombia, animals are able to sue to protect their rights and because the plaintiffs in the Colombian lawsuit are the hippos themselves, the ALDF argued that the hippos qualify as an “interested person” under U.S. law.  After applying for the authorization, the federal court signed off on ALDF’s application and issued an order authorizing the attorney for the hippos to issue subpoenas for the testimony of the Ohio experts.  After the federal court’s order, the ALDF issued a press release titled “Animals Recognized as Legal Persons for the First Time in U.S. Court.”  The ALDF claims the federal court ruling is a “critical milestone in the broader animal status fight to recognize that animals have enforceable rights.”  However, critics of ALDF’s assertions point out that ALDF’s claims are a bit embellished.  According to critics, the order is a result of an ex parte application to the court, meaning only one side petitioned the court for the subpoenas and the other side was not present to argue against the subpoenas.  Further, critics claim that all the federal court did was sign an order allowing the attorney for the hippos to take expert testimony, the court did not hold that hippos are “legal persons” under the law.  

Ohio Department of Agriculture announces quarantine to combat the spread of the Spotted Lanternfly.  According to the Ohio Department of Agriculture (“ODA”) the Spotted Lanternfly (“SLF”) has taken hold in Jefferson and Cuyahoga counties.  The ODA announced that the SLF is now designated as a destructive plant pest under Ohio law and that the ODA was issuing quarantine procedures and restricting the movement of certain items from infested counties into non-infested areas of Ohio.  The ODA warns that the SLF can travel across county lines in items like tree branches, nursery stock, firewood, logs, and other outdoor items.  The ODA has created a checklist of things to look for before traveling within or out of infested counties.   Nurseries, arborists, loggers, and other businesses within those infested counties should contact the ODA to see what their obligations and rights are under the ODA’s new quarantine instructions.  Under Ohio law, those individuals or businesses that fail to follow the ODA’s quarantine instructions could be found guilty of a misdemeanor of the third degree on their first offense and a misdemeanor of the second degree for each subsequent offense.  For more information visit the ODA’s website about the SLF.

The Ag Law Harvest

Written by Evin Bachelor, Law Fellow and Sr. Research Associate

We’re back from another successful Farm Science Review!  Thank you to everyone who stopped by our booth to ask us questions and pick up law bulletins.  We received some great suggestions on new topics affecting agricultural law, so stay tuned as we post more to our Ag Law Blog and Law Library in the near future.

Here’s our gathering of ag law news you may want to know:

ODA reviews meat inspection rules.  Ohio’s meat inspection rules are up for review under the state’s Five-Year Review requirement.  The Ohio Department of Agriculture (ODA) recently posted the proposed changes to Ohio Administrative Code 901:2-1; 901:2-3; 901:2-6; and 901:2-7 for stakeholder comment on its website.  The primary changes to the substance of the rules are meant to bring them into compliance with new federal requirements that took effect earlier this year.  ODA also proposes to merge the interstate and intrastate regulations, which could change some rule numbers, but not necessarily their substance.  ODA will be accepting comments until Monday, October 1, 2018, which stakeholders may submit to AGReComments@agri.ohio.gov.

OSU explains tariff relief program and impacts.   Our good friend and economist Ben Brown and other policy experts in OSU’s College of Food, Agricultural, and Environmental Sciences recently published information that explains and analyzes the USDA’s response to the tariffs.  View a brief brochure that explains the Market Facilitation Program here.  View a longer report on the Market Facilitation Program and the impacts on farm income in Ohio here .

U.S. EPA petitions for new hearing on Chlorpyrifos registrations.  A panel of three judges on the U.S. Court of Appeals for the Ninth Circuit in San Francisco ordered the U.S. Environmental Protection Agency (EPA) to cancel chlorpyrifos registrations in August.  The judges cited scientific evidence that the chemical insecticide causes developmental defects in children.  The U.S. Department of Justice (DOJ), on behalf of the U.S. EPA, filed a petition on Monday, September 24th, requesting an en banc hearing on the decision.  If granted, an en banc hearing would involve all the judges who serve on the Ninth Circuit, rather than only the three judges who initially ordered the cancellation of the registrations.  The U.S. DOJ argues that the August decision was incorrect and that the court should allow the U.S. EPA to reconsider the insecticide’s registration.  For more details, check out The Progressive Farmer’s post here.

License needed to broker oil and gas leases in Ohio.  On Tuesday, September 25th, the Ohio Supreme Court decided that oil and gas leases fall within the statutory definition of “real estate.”  As such, a person who offers and negotiates an oil and gas lease must have a real estate broker’s license under Ohio Revised Code § 4735.01(A) and § 4735.02(A).  Check out Court News Ohio’s webpage for more details.

No “bill of rights” vote for Lake Erie.  The group Toledoans for Safe Water sought to put a “Lake Erie Bill of Rights” on the ballot this November as an amendment to the Toledo City Charter.  The amendment would have stated that Lake Erie and its watershed “possess the right to exist, flourish, and naturally evolve,” and that the citizens of Toledo have a right to a clean and healthy environment.  Enforcement would have been through a mix of revoking corporate licenses and privileges or criminal penalties if violated.  Despite having enough signatures, the Lucas County Board of Elections refused to place the issue on the ballot, saying that the amendment contained provisions beyond the City of Toledo’s authority.  The dispute made it up to the Ohio Supreme Court, which on Friday, September 21st, decided that Toledoans for Safe Water failed to prove that the Lucas County Board of Elections improperly denied their petition to place the issue on the ballot.  The court’s decision is here.

Iowa court makes owner liable for corporate liabilities.  An Iowa Court of Appeals decision recently allowed a plaintiff who was suing a biosolids management corporation to “pierce the corporate veil” and collect directly from the sole owner of the corporation.  The plaintiff obtained a judgment of $410,067 against the corporation for breach of contract after the corporation stopped performing its work.  However, the plaintiff could not collect against the corporation, and an Iowa Court of Appeals decided that the sole owner must pay the judgement.  The court said that the owner did not conduct the business or maintain its finances in a manner that demonstrates the existence of a separate legal entity from himself or his other businesses.  The owner co-mingled corporate and personal assets and accounts, failed to keep records, and had no bylaws or meeting records.  For more on the case, visit the Iowa State University’s Center for Agricultural Law and Taxation website here, or view the case opinion here.

California passes “home cooked food” law.  California’s governor signed a bill into law last Friday that allows cities and counties to authorize and permit residents to operate “microenterprise home kitchens.”  Assembly Bill 626 exempts qualifying businesses from some food service facility regulations to allow residents to sell prepared food from their home, while also recognizing the differences between a home kitchen and a commercial kitchen.  To qualify, among other things, the operation can have no more than one full-time non-family employee, the food must be sold direct to the customer, and no more than 60 individual meals can be prepared per week.  The bill’s full text and legislative analysis are here.

Barn wedding popularity continues to grow.  Fifteen percent of weddings in the United States took place in a barn last year, according to a survey published by the wedding planning site The Knot.  In comparison, only two percent of weddings took place in a barn as recently as 2009.  The popularity of wedding barns has become a point of contention in many states, including Ohio, because statutory zoning exemptions for agriculture have been used to exempt wedding barns from zoning requirements.  We explain Ohio’s zoning exemption for “agritourism” in this law bulletin.

Ohio legislation on the move:

• Ohio Senate refers township bill to committee.  The Ohio House of Representatives passed House Bill 500 earlier this summer, and the bill has recently been referred to the Ohio Senate’s Local Government, Public Safety, and Veterans Affairs Committee.  House Bill 500 proposes to make a number of changes to Ohio’s township statutes, including a change to agricultural zoning regulations.  If passed as-is, the bill would allow a township to use zoning to regulate agricultural activities within any platted subdivision.  Under current law, townships are limited to a specified list of platted subdivisions that townships may regulate; however, the new law clarifies that the specified list is not intended to be exclusive.  For more information on the bill, view the bill analysis produced by the Ohio Legislative Service Commission, or visit the Ohio General Assembly’s website here.

OSU to host Law Symposium on Oil and Gas

With shale development hitting Ohio at a rapid pace, OSU’s Agricultural & Resource Law Program will host our first Ohio Oil and Gas Law Symposium on Thursday, June 16, 2011.  “The New Ohio Oil and Gas Boom:  Drilling into Legal Issues,” will take place at the Longaberger Golf Club near Newark, Ohio.  The day-long educational program for attorneys will address many of the initial legal issues related to development of Ohio’s Marcellus and Utica shale resources, including these topics and speakers:

• “An Overview of the Shale Resource” with Tom Murphy of Penn State’s Marcellus Center for Outreach and Research.
• “Mandatory Pooling and Current Regulatory Issues,” by Sandra Ramos, Legal Counself for Ohio Department of Natural Resources Division of Mineral Resources Management
• “Dealing with Dormant Minerals and Old Leases,” by Eric Johnson of Johnson and Johnson Law Firm, Canfield
• “Ohio Oil and Gas Leases:  A Primer,” with Gregory Russell of Vorys, Sater, Seymour and Pease, LLP, Columbus
• Landowner Leasing Issues Panel Discussion
• “Representing Landowner Groups in Oil and Gas Leasing,” with Chris Finney of Logee, Hostetler, Stutzman and Lehman, LLC, Wooster

For more information on our Ohio Oil and Gas Law Symposium, visit https://www.regonline.com/OilandGasLaw.