Atlantic Richfield Co. v. Whiting Oil & Gas Corp.
178 Oil & Gas Rep. 637, 2014 CO 16, 320 P.3d 1179 (2014)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A commercial option to purchase real property that is fully and unilaterally revocable by the grantor at any time does not violate the common law rule against perpetuities because it poses no practical restraint on alienation.
Facts:
- In 1968, Atlantic Richfield Company (ARCO) and Equity Oil Company (Equity) entered into agreements to develop oil shale on a property known as the Boies Block, whereby Equity conveyed a partial interest in the property to ARCO.
- The agreement stipulated that if commercial production was not achieved by 1988, Equity would convey an additional interest to ARCO.
- In 1983, the parties amended the agreement, and ARCO granted Equity a 25-year option to buy back ARCO's interest, which was set to expire in 2008.
- The 1983 amendment explicitly stated that ARCO retained "the sole and exclusive right to cancel this Option at any time during its term."
- The option's exercise price was tied to the market price of West Texas sour crude oil.
- In the early 2000s, valuable natural gas reserves were discovered on the property, making the option's oil-based price formula significantly below market value.
- In 2006, Equity attempted to exercise the option, but ARCO, which had not previously revoked the option, refused to convey its interest in the property.
Procedural Posture:
- Equity Oil Company sued Atlantic Richfield Company in a Colorado state trial court, seeking specific performance of the 1983 option.
- ARCO moved for judgment on the pleadings, arguing the option was void ab initio for violating the common law rule against perpetuities.
- The trial court found that the option violated the rule but denied ARCO's motion, holding that the option could be reformed under a state statute, § 15-11-1106(2).
- Following a bench trial, the court reformed the option by adding a savings clause and ordered specific performance for Equity.
- ARCO, as appellant, appealed the judgment to the Colorado Court of Appeals.
- The Court of Appeals affirmed the trial court's judgment, holding that the reformation statute was properly applied to the commercial option.
- ARCO successfully petitioned the Colorado Supreme Court for a writ of certiorari.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a commercial option to purchase real property that is fully revocable at any time by the grantor violate the common law rule against perpetuities?
Opinions:
Majority - Justice Marquez
No. A commercial option that is fully revocable by the grantor does not violate the common law rule against perpetuities. The court reasoned that the rule against perpetuities was developed to curb 'dead-hand control' in family gift transactions and is ill-suited to commercial agreements. The court's prior case law, such as in Atchison and Cambridge, demonstrates a shift away from a technical application of the rule in commercial settings towards an analysis of whether an interest creates an unreasonable restraint on alienation. Here, the critical fact is that ARCO retained the unilateral power to cancel the option at any time. This power of revocation meant ARCO retained full control to improve or dispose of the property, thus the option posed no practical restraint on alienation. Because the option did not violate the common law rule, it was valid as written, and the reformation statute, section 15-11-1106(2), which only applies to interests that violate the rule, is inapplicable.
Analysis:
This decision significantly clarifies Colorado's application of the common law rule against perpetuities to pre-1991 commercial transactions, aligning it with the modern trend and the Restatement (Third) of Property. It firmly establishes that the analysis should focus on the substance of the transaction—specifically, whether it imposes a practical restraint on alienation—rather than on a rigid, technical application of the rule's vesting period. By carving out a clear exception for revocable options, the court provides certainty for commercial parties and protects bargained-for agreements from being invalidated by an archaic doctrine ill-suited to their context. This holding will likely reduce future litigation over similar commercial instruments created before the adoption of the statutory rule.
Unlock the full brief for Atlantic Richfield Co. v. Whiting Oil & Gas Corp.