Mun. Auth. of Westmoreland Cnty. v. CNX Gas Co.
380 F.Supp.3d 464 (2019)
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Rule of Law:
Under Pennsylvania law, a party's past waiver of a contractual right through a course of conduct does not permanently modify the contract absent new consideration or detrimental reliance, allowing the party to prospectively enforce the right. A tort claim for conversion arising from a dispute over contract payments is barred by the gist of the action doctrine when the duty to pay is created solely by the contract.
Facts:
- In 2002, Municipal Authority of Westmoreland County (MAWC) leased approximately 2,255 acres of land to Dominion Exploration & Production, Inc. for gas production under a lease that permitted the lessee to deduct post-production costs from royalty payments.
- From 2002 to April 2010, Dominion operated the lease but never deducted any post-production costs from MAWC's royalties, despite incurring such costs.
- The lease was assigned to CONSOL Gas in 2010 and then to CNX Gas Company (CNX) in 2011; both successors also initially paid royalties to MAWC without deducting any post-production costs.
- In September 2011, CNX assigned a 50% working interest in the lease to Noble Energy, Inc. (Noble).
- Beginning with gas production in October 2011, CNX began deducting a pro rata share of post-production costs from MAWC's royalty payments. Noble began doing the same in November 2012.
- All natural gas produced under MAWC's lease was 'dry gas,' which is less expensive to gather and process than 'wet gas.'
- The lessees deducted a 'blended' gathering fee charged by an affiliated company that averaged the costs of processing both wet and dry gas from various leases. Noble also deducted electricity costs for services like electrical compression that were not used for the gas produced from MAWC's lease.
Procedural Posture:
- Plaintiff Municipal Authority of Westmoreland County (MAWC) commenced a putative class action lawsuit against defendants CNX Gas Company (CNX) and Noble Energy (Noble) in a Pennsylvania state court.
- CNX, with Noble's consent, removed the case to the United States District Court for the Middle District of Pennsylvania.
- MAWC filed an amended complaint asserting claims for breach of contract and conversion.
- The parties completed merits discovery on MAWC's individual claims, bifurcating it from class certification discovery.
- Defendants CNX and Noble each filed a motion for summary judgment on all claims against them.
- Plaintiff MAWC filed a cross-motion for partial summary judgment on its breach of contract claims.
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Issue:
Under an oil and gas lease that permits the deduction of post-production costs, does a lessee's multi-year history of not deducting such costs permanently waive or modify that right, and does the subsequent deduction of allegedly improper costs give rise to a tort claim for conversion?
Opinions:
Majority - Conner, C.J.
No. A lessee's past, consistent failure to exercise a contractual right to deduct post-production costs constitutes a waiver for those past periods but does not permanently modify the contract to eliminate that right for the future, and a dispute over the propriety of such deductions sounds in contract, not tort, and is therefore barred by the gist of the action doctrine. The court distinguished between waiver, which is the temporary and intentional relinquishment of a known right, and modification, which is a permanent change to a contract's terms. A modification requires new consideration, which was absent here. The lessees' years of not deducting costs was an implied waiver for those past periods, but they were permitted to retract that waiver and begin enforcing the right prospectively, so long as the retraction was not unjust due to MAWC's detrimental reliance. MAWC could not show detrimental reliance because its royalty revenues for the relevant fiscal year, even with the deductions, significantly exceeded its own budget projections due to new, highly productive wells. The court also held that MAWC's conversion claim was barred by Pennsylvania's 'gist of the action' doctrine. The duty to pay royalties, and the corresponding right to deduct costs, arose solely from the contract. Therefore, the dispute over whether the deductions were proper is fundamentally a breach of contract claim, not a tort claim for conversion. However, the court denied summary judgment on the claims that the specific costs deducted were unreasonable, finding a genuine dispute of material fact as to whether charging MAWC a blended wet/dry gas gathering fee and electricity costs for services not rendered was a breach of the lease.
Analysis:
This case reinforces the high bar for proving contract modification through course of conduct under Pennsylvania law, emphasizing the distinct requirements of new consideration or detrimental reliance. It clarifies the critical legal distinction between a temporary, retractable waiver and a permanent contract modification, providing guidance for parties wishing to resume enforcement of previously unenforced contract terms. Furthermore, the court's application of the 'gist of the action' doctrine strictly maintains the boundary between contract and tort law, preventing litigants from recasting a simple payment dispute as a tort to gain procedural advantages or seek punitive damages. The decision also signals to oil and gas lessees that while deducting post-production costs may be contractually permitted, those costs must be genuinely and reasonably incurred for the specific gas produced from a given lease, rather than allocated through broad, potentially inequitable averaging schemes with affiliated entities.
