One may assume that business contracts are binding, but in cases where a state law takes precedence over a company’s agreement with other entities, the law may render such contract agreements void. The Kentucky Court of Appeals recently overturned a verdict of $24.7 million in royalties after their panel of three judges decided that despite contracts that were signed to promise payment, the plaintiffs did not have any right to the royalties, per state law.
In 2010, a jury ruled in favor of several Kentucky landowners and a third-party company against Atmos Energy of Dallas for royalties from the drilling of oil and gas beneath the landowners’ property. When Atmos didn’t pay the royalties, the landowners sued for fraud. A judge wrote that even had the company been required to pay, their failure to honor the agreement would have been classified as breach of contract, rather than fraud.
Kentucky law states that the ownership claim of oil and gas underneath a property belongs to the person who signed the lease to drill, and not to the landowners. Therefore the plaintiffs did not have any claim to receive payment for the drilling. Atmos Energy had reached agreements to drill the gas with a company called Park City, and later argued that they’d overestimated the amount of gas ultimately taken from the properties.
Atmos is currently involved in further litigation with another company that handled part of the drilling, as well as a reopened case with one of the landowners. It’s crucial for all parties signing a contract to have a thorough understanding of state law where it applies to their agreement, to avoid litigation over contract disputes.
Source: Houston Chronicle, “Ky. court overturns $24 million royalty verdict,” Brett Barrouquere, Jan. 25, 2013