State, Dept. of Natural Resources v. Alaskan Crude Corporation , 441 P.3d 393 ( 2018 )

Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER.
Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,
303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email
corrections@akcourts.us.
THE SUPREME COURT OF THE STATE OF ALASKA
STATE OF ALASKA, )
DEPARTMENT OF NATURAL ) Supreme Court Nos. S-16308/16417
RESOURCES, ) (Consolidated)
)
Appellant and ) Superior Court No. 3AN-10-04671 CI
Cross-Appellee, )
) OPINION
v. )
) No. 7283 – August 31, 2018
ALASKAN CRUDE CORPORATION )
and JAMES W. WHITE, )
)
Appellees and )
Cross-Appellants. )
)
Appeal from the Superior Court of the State of Alaska, Third
Judicial District, Anchorage, Charles W. Ray, Jr., Judge.
Appearances: John C. Hutchins, Assistant Attorney General,
and Jahna Lindemuth, Attorney General, Juneau, for
Appellant and Cross-Appellee. James W. White, pro se,
Houston, Texas, Appellee and Cross-Appellant. James B.
Gottstein, Law Offices of James B. Gottstein, Anchorage, for
Appellee and Cross-Appellant James W. White (limited
appearance for oral argument). No appearance by Appellee
and Cross-Appellant Alaskan Crude Corporation.
Before: Stowers, Chief Justice, Winfree, Maassen, Bolger,
and Carney, Justices.
MAASSEN, Justice.
I. INTRODUCTION
An oil and gas lessee conducted drilling activity on the last day of the lease
term; the lease provided that such activity would extend the term. Two days later,
however, the Department of Natural Resources (DNR) sent the lessee a notice that his
lease had expired. The lessee suspended drilling activities and asked DNR to reconsider
its decision and reinstate the lease.
DNR reinstated the lease several weeks later. The lessee, however,
contended that the reinstatement letter added new and unacceptable conditions to the
lease, and he pursued administrative appeals. Six months later DNR terminated the lease
on grounds that the lessee had failed to diligently pursue drilling following the lease’s
reinstatement.
The superior court reversed DNR’s termination decision, ruling that DNR
had materially breached the lease by reinstating it with new conditions. Both DNR and
the lessee appealed to this court. DNR asks us to affirm the termination of the lease, and
the lessee asks us to remand to the agency for a determination of his damages.
We conclude that although DNR breached the lease in its notice of
expiration, it cured the breach through reinstatement. And DNR’s subsequent decision
to terminate the lease is supported by substantial evidence that the lessee failed to
diligently pursue drilling activities following reinstatement. Finally, we conclude that
neither DNR nor the superior court erred in failing to address the lessee’s damages claim.
We reverse the superior court’s decision reinstating the lease and affirm DNR’s
termination decision.
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II. FACTS AND PROCEEDINGS
A. Facts
On January 1, 2002, DNR and an individual lessee entered into a
competitive oil and gas lease identified as ADL 389922, covering a 4,800-acre parcel
near Cook Inlet. The lessee later assigned the lease to James W. White.1 The lease had
a primary term of seven years, but it also identified circumstances in which the term
could be extended.
On the leased land was a plugged and abandoned well. It was White’s
intent to reenter and test this well, but reentry was prohibited by spacing regulations of
the Alaska Oil and Gas Conservation Commission (AOGCC) because of the well’s
proximity to a property line. The AOGCC granted White an exception from the
regulations, and in March 2005 it granted White a permit to reenter and test the well.
White began drilling in June 2007, but he soon suspended operations
following the announcement that a fertilizer plant, his only prospective buyer, was about
to close. On December 31, 2008, the last day of the seven-year lease term, a DNR
inspector observed signs of activity at the drill site: the presence of a drill rig, the
assembly of a blowout preventer, and completion of the initial reentry of the well plug.
B. Agency Actions And Proceedings
On January 2, 2009, DNR mailed White a notice of expiration, informing
him “that in accordance with the lease agreement, ADL 389922 expired on December 31,
2008,” and “[t]he case file has been closed in this office.” White suspended operations
and moved his equipment from the drill site. But on January 15 he wrote the Director
1
White is the President of Alaskan Crude Corporation, the operator of the
lease. Alaskan Crude participated in the administrative and superior court appeals but
does not participate in this appeal.
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of the Division of Oil and Gas, asking him to clarify whether the expiration notice had
been sent in error. White called the Director’s attention to paragraph 4(c)(1) of the lease,
which allowed extension of the lease if drilling had “commenced as of the date on which
the lease otherwise would expire”;2 White asserted that he was drilling on the last day
of the lease term, as witnessed by the DNR representative at the site. He claimed that the
expiration notice was “a direct breach of [the] lease contract” and damaged his interests
as lessee. He asked DNR to “please correct [the notice] and advise me by email before
2:00PM Friday, January 16th that the lease is still in effect.” DNR did not immediately
respond to White’s letter.
On January 20 White appealed the expiration notice to the DNR
Commissioner, seeking “reinstatement of the lease term” or an acknowledgment that the
lease had not expired. White sent another letter to the Commissioner on January 26.
Urging the Commissioner to make a decision, he asserted that DNR had “received ample
documentation of prior well boring activities, along with video, eye witness testimony
and photos of . . . setting the blowout preventer on December 31, 2008.”
On January 27 the Commissioner retracted the expiration notice and
reinstated the lease. The Commissioner found that White’s documented activity on the
last day of the lease term was “drilling” as defined in paragraph 34(4) of the lease and
extended the lease under paragraph 4(c)(1). But the Commissioner advised White that
2
Paragraph 4(c)(1) provides in full:
If the drilling of a well whose bottom hole location is in the
leased area has commenced as of the date on which the lease
otherwise would expire and is continued with reasonable
diligence, this lease will continue in effect until 90 days after
cessation of that drilling and for so long as oil or gas is
produced in paying quantities from the leased area.
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the well had to be completed “within 90 days of this decision” or the lease would be
automatically terminated. The Commissioner added: “After 90 days from the date of
this letter, April 27, 2009, we will review your progress to determine whether continued
lease extension is warranted.” The Commissioner summarized:
[T]he continued extension of the lease is contingent upon
(1) continued drilling of the well; (2) completion of the well
by April 27, 2009; (3) valid permits for all operations; and
(4) sustained production within 90 days following the
cessation of drilling. The failure to comply with any of these
conditions will result in the automatic termination of this
lease.
On February 11 White sought reconsideration of the reinstatement letter.
He asserted that the letter’s conditions on reinstatement were in fact attempts to
unilaterally modify the original lease, and he asked the Commissioner to “remove any
and all extra conditions included in [his] decision.” Taking particular issue with the
requirement that he complete the well by April 27, White warned that he could not drill
once winter was over and would not “risk further capital and resources if the lease will
expire if [he does] not finish the drilling operations before the arbitrary deadline.”
On February 18 the Commissioner granted reconsideration and gave White
the opportunity “to submit additional written material or request a hearing.” The
Commissioner advised White that during reconsideration the reinstated lease “remain[ed]
in effect for [White] to pursue continued drilling operations.” White declined a hearing
but submitted another letter explaining his position in detail. On June 10 the
Commissioner reaffirmed the January 27 reinstatement letter, explaining that the
language White deemed a modification was simply a departmental interpretation of lease
paragraph 4(c)(1) and governing law — AS 38.05.180(m) and 11 Alaska Administrative
Code (AAC) 83.125. The Commissioner wrote that the April 27 deadline was his
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interpretation of the lease requirement that drilling be completed with reasonable
diligence and that it had been calculated by trebling the 30-day estimate White gave in
his own original plan of operations. Responding to White’s argument that DNR “could
not require that he bring the completed well into production within 90 days after drilling
ends,” the Commissioner stated that “the 90 day requirement is clearly set forth in
AS 38.05.180(m) and [the] lease.”3
Six weeks later, by letter from the Director of the Division of Oil and Gas
dated July 23, 2009, DNR terminated White’s lease for “two independent reasons”: first,
because “according to the AOGCC, Mr. White [did] not have a valid drill permit”; and
second, because “White did not continue to diligently drill after the lease was re-instated
on January 27, 2009.” The Director explained that DNR had attempted to confirm
White’s drilling activities and permit status following the reinstatement. DNR had sent
White letters, and White had responded but without answering DNR’s specific questions.
DNR eventually learned that the AOGCC had terminated White’s drilling permit, an
action White was appealing.
White appealed the termination of his lease to the Commissioner, asking
that it again be reinstated. After some procedural delay not relevant here, White was
granted an administrative hearing presided over by the Deputy Commissioner. White
asked for “reinstatement of ADL 389922 lease terms, or alternatively an
acknowledgment from DNR that the lease term did not expire as stated in a letter dated
3
See AS 38.05.180(m) (“If drilling, including operations such as redrilling,
sidetracking, or using other means necessary to reach the originally proposed bottom
hole location, has commenced on the expiration date of the primary term of the lease and
is continued with reasonable diligence, the lease continues in effect until 90 days after
drilling has ceased and for so long thereafter as oil or gas is produced in paying
quantities.”); lease ¶4(c)(1), quoted supra note 2.
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January 2nd, 2009, and also an order dated July 23rd, 2009.” The Deputy
Commissioner’s decision affirmed termination of the lease.
White appealed to the superior court. The court ordered a remand for a new
administrative hearing on the ground that DNR violated White’s due process rights when
one of its attorneys, having initially advised DNR on White’s administrative appeal, then
advised the Deputy Commissioner in her role as hearing officer. To provide guidance
on remand the superior court also addressed the terms of the January 2009 reinstatement
letter and the AOGCC permit. The superior court directed DNR that it could not
terminate White’s lease based on the permit’s validity before the AOGCC had finally
decided that issue. As for the reinstatement letter, the court interpreted its four
conditions as not imposing “new conditions or unilateral amendments . . . . Instead,
DNR appears to be reminding White of his obligations under the lease.” The court
directed the agency on remand to review White’s efforts after reinstatement “to
determine if he continued drilling with reasonable diligence” based on the totality of the
circumstances, stressing that failure to meet the April 27 deadline alone was insufficient
to show a lack of reasonable diligence.
On remand, following a second administrative hearing before a different
hearing officer, the Commissioner again upheld DNR’s termination of the lease. The
Commissioner explained that White “did not demonstrate that [he] continued to drill with
reasonable diligence or . . . failed to drill for reasons demonstrating reasonable diligence
within the totality of the circumstances.”
White again appealed to the superior court, where the case was heard by a
different superior court judge.4 After briefing and argument, the court ruled that DNR’s
4
The appeal before remand was heard by Superior Court Judge Mark
(continued...)
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January 2009 notice of expiration was a material breach: “An unjustified, outright
cancellation of a contract cannot be other than a ‘material breach.’ ” The court further
determined, contrary to the court’s analysis in the first appeal, that the breach was not
cured by DNR’s reinstatement of the lease 25 days later; the court reasoned that the
reinstatement letter’s requirement for “sustained production within 90 days following
cessation of drilling” fundamentally conflicted with paragraph 4(d) of the lease, which
allows a lessee at least six months after notice to bring “a well capable of producing oil
or gas in paying quantities” into production.5 The court interpreted the lease as requiring
“reasonableness and diligence, not deadlines,” especially deadlines resulting in automatic
termination if not met. The court held that DNR’s material breach relieved White of his
own lease obligations, and it therefore ordered that the lease be reinstated for a
reasonable time for White “to resume, and then diligently continue, drilling in
accordance with the Lease.” The court declined to address White’s damage claims,
noting that “[w]hether other remedies are in order was not addressed by the parties.”
Both parties appealed to this court.6
4
(...continued)
Rindner. The appeal following the second administrative hearing was heard by Superior
Court Judge Charles W. Ray, Jr.
5
Paragraph 4(d) provides: “If there is a well capable of producing oil or gas
in paying quantities on the leased area, this lease will not expire because the lessee fails
to produce that oil or gas unless the state gives notice to the lessee, allowing a reasonable
time, which will not be less than six months after notice, to place the well into
production, and the lessee fails to do so. If production is established within the time
allowed, this lease is extended only for so long as oil or gas is produced in paying
quantities from the leased area.”
6
White filed a motion for reconsideration of the superior court’s order,
arguing that the issue of damages should have been remanded to the agency. The
(continued...)
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III. STANDARDS OF REVIEW
We “independently review the merits of an administrative determination.”7
We have “recognized four principal standards of review for
administrative decisions: (1) the substantial evidence standard
applies to questions of fact; (2) the reasonable basis standard
applies to questions of law involving agency expertise;
(3) the substitution of judgment standard applies to questions
of law where no expertise is involved; and (4) the reasonable
and not arbitrary standard applies to review of administrative
regulations.”[8]
“Questions of contract interpretation generally raise questions of law that
we review de novo.”9 “Under this standard, we exercise our independent judgment,
substituting it ‘for that of the agency even if the agency’s [interpretation] ha[s] a
reasonable basis in law.’ ”10 We will “adopt the rule of law that is most persuasive in
6
(...continued)
superior court denied reconsideration after White filed a motion asking that it refrain
from ruling until we decided DNR’s appeal.
7
Handley v. State, Dep’t of Revenue, 838 P.2d 1231, 1233 (Alaska 1992).
8
Alaskan Crude Corp. v. State, Dep’t of Nat. Res., Div. of Oil & Gas, 261
P.3d 412, 419 (Alaska 2011) (quoting Pasternak v. State, Commercial Fisheries Entry
Comm’n, 166 P.3d 904, 907 (Alaska 2007)).
9
Id. (quoting Beal v. McGuire, 216 P.3d 1154, 1162 (Alaska 2009)); Exxon
Corp. v. State, 40 P.3d 786, 792 (Alaska 2001) (“Interpretation of a contract is a question
of law that is not within the department’s special expertise or skill.”).
10
City of Valdez v. State, 372 P.3d 240, 246 (Alaska 2016) (alterations in
original) (quoting Tesoro Alaska Petroleum Co. v. Kenai Pipe Line Co., 746 P.2d 896,
903 (Alaska 1987)).
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light of precedent, reason and policy.”11
However, notwithstanding the usual substitution of judgment standard for
questions of contract interpretation, we have applied the reasonable basis standard of
review to agency interpretations of specialized contract terms derived from statutes or
regulations.12
IV. DISCUSSION
DNR appeals the superior court’s decision that it must reinstate White’s
lease, arguing that neither the January 2009 notice of expiration nor the subsequent
reinstatement letter was a material breach of the lease. White’s appeal argues that the
superior court erred by failing to remand the issue of his damages to the agency for a
determination of what he is owed.
A. The Commissioner Did Not Err In His 2013 Decision Affirming
Termination of the Lease.
We agree with the superior court that DNR’s January expiration notice
materially breached the lease, but we conclude that the breach was cured by the
11
Thoeni v. Consumer Elec. Servs., 151 P.3d 1249, 1253 (Alaska 2007).
12
See Alaskan Crude Corp., 261 P.3d at 419 (applying reasonable basis
standard when interpreting force majeure clause because force majeure was defined in
DNR regulations); ConocoPhillips Alaska, Inc. v. State, Dep’t of Nat. Res., 109 P.3d 914,
920-21 (Alaska 2005) (applying reasonable basis standard when interpreting royalty
rights clause subject to administrative process defined in regulations); N. Alaska Envtl.
Ctr. v. State, Dep’t of Nat. Res., 2 P.3d 629, 633 n.12 (Alaska 2000) (“[W]here the
agency interprets technical or esoteric terminology, we have applied reasonable basis
review.” (citing Pan Am. Petroleum Corp. v. Shell Oil Co., 455 P.2d 12, 20-22 (Alaska
1969))). “Examples of such terms we have deemed to be non-technical include ‘adjacent
to,’ ‘local authorized planning agencies,’ ‘disposal,’ ‘interest in land,’ and ‘revocable.’
” City of Valdez, 372 P.3d at 247 (first quoting State v. Aleut Corp., 541 P.2d 730, 736­
38 (Alaska 1975); and then quoting N. Alaska Envtl. Ctr., 2 P.3d at 633).
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reinstatement letter. Thereafter, White continued to have the contractual duty to engage
in drilling operations with reasonable diligence; the Commissioner’s decision that he
failed in that duty is supported by substantial evidence.
1. The expiration notice breached the lease.
Paragraph 4(c)(1) of the lease obligated DNR to extend the lease if White
was engaged in drilling operations on December 31, 2008. DNR does not dispute that
White satisfied this condition and that it was therefore obligated to extend the lease. But
DNR sent White a letter on January 2, 2009, announcing without further explanation that
the lease had expired. DNR argues both that the expiration notice was not a breach and
that, if it was, the breach was not material.
DNR contends that the expiration notice could not be a breach because it
“had no language suggesting that the [S]tate would not perform.” We conclude,
however, that any other reading of the notice is unreasonable. “When performance is
due, . . . anything short of full performance is a breach, even if the party who does not
fully perform was not at fault and even if the defect in his performance was not
substantial.”13 The expiration notice stated perfunctorily that the lease had “expired” and
DNR had closed its “case file.” The notice clearly contemplated no further action by
DNR. The hearing officer at the second administrative hearing found that White’s
actions in response to the notice — removing his equipment “from the drilling site to a
different, presumably off-lease site location” — were “not unreasonable . . . in the sense
of vacating a lease which had apparently been terminated.”14 And DNR’s later actions
13
RESTATEMENT (SECOND) OF CONTRACTS § 235 cmt. b (AM. LAW INST.
1981).
14
See 58 C.J.S. Mines and Minerals § 337, Westlaw (database updated
(continued...)
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in “retract[ing]” the expiration notice and “reinstat[ing]” the lease would not have been
necessary had DNR actually viewed the lease as continuing in effect.
DNR asserts that the expiration notice was only an “anticipatory breach,”
not “sufficiently positive” to show that DNR had no intent to perform its obligations as
they came due.15 The law of anticipatory breach applies when a party repudiates a
contract, evidencing the intent to breach the contract before the party needs to perform.16
As factors weighing against a finding of repudiation, DNR points to the notice’s
language, the fact it was signed by a junior employee (a “Natural Resource Specialist”),
and the lessee’s contractual right to appeal.
As noted above, we conclude that the notice’s language — advising that the
lease had “expired” and that “[t]he case file has been closed” — “[is] sufficiently positive
to be reasonably interpreted to mean” that DNR was not extending the lease.17 This was
14
(...continued)
Mar. 2018) (“[R]epudiation of an oil and gas lease by a lessor relieves the lessee of any
obligation to conduct any operation on the land in order to maintain the lease in force
pending a judicial resolution of the controversy between the lessee and the lessor over
the validity of the lease.” (citing Teon Mgmt., LLC v. Turquoise Bay Corp., 357 S.W.3d
719, 730 (Tex. App. 2011))).
15
See K & K Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 715 (Alaska
2003) (“To be a repudiation, ‘a party’s language must be sufficiently positive to be
reasonably interpreted to mean that the party will not or cannot perform.’ ” (quoting
RESTATEMENT (SECOND) OF CONTRACTS § 250 cmt. b (AM. LAW. INST. 1981))).
16
Repudiation, BLACK’S LAW DICTIONARY (10th ed. 2014) (defining
“repudiation” as “[a] contracting party’s words or actions that indicate an intention not
to perform the contract in the future; a threatened breach of contract”); see Drake v.
Wickwire, 795 P.2d 195, 198 (Alaska 1990) (quoting RESTATEMENT (SECOND) OF
CONTRACTS § 253(1) (AM. LAW. INST. 1981)).
17
See K & K Recycling, Inc., 80 P.3d at 715 (quoting RESTATEMENT
(continued...)
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“a clear, unequivocal challenge to [White’s] title to an interest in the lease” and thus a
repudiation.18
The fact that the notice was signed by a junior employee does not change
this conclusion. Indeed, DNR does not argue that the signing employee lacked the
necessary authority. Arguing that White should nonetheless have viewed the notice as
something less than final, DNR points to lease paragraph 24, which identifies the
Director of the Division of Oil and Gas as the authorized agent “for purposes of
administering this lease.” But “[a] notification given by an agent is effective as
notification given by the principal if the agent has actual or apparent authority to give the
notification.”19 “Apparent authority to do an act is created as to a third person when a
principal’s conduct, reasonably interpreted, ‘causes the third person to believe that the
principal consents to have the act done on his behalf by the person purporting to act for
him.’ ”20
17
(...continued)
(SECOND) OF CONTRACTS § 250 cmt. b (AM. LAW. INST. 1981)); Expire, BLACK’S LAW
DICTIONARY (10th ed. 2014) (“Expire” means “to be no longer legally effective; to
become null at a time fixed beforehand”).
18
See 58 C.J.S. Mines and Minerals, Westlaw (database updated Mar. 2018)
(citing Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236, 239 (Tex. App. 1994)).
19
RESTATEMENT (THIRD) OF AGENCY § 5.02(2) (AM. LAW. INST. 2006).
20
Airline Support, Inc. v. ASM Capital II, L.P., 279 P.3d 599, 604-05 (Alaska
2012) (quoting Askinuk Corp. v. Lower Yukon Sch. Dist., 214 P.3d 259, 264 (Alaska
2009)). “We consider three factors when evaluating apparent authority: ‘(1) the
manifestations of the principal to the third party; (2) the third party’s reliance on the
principal’s manifestations; and (3) the reasonableness of the third party’s interpretation
of the principal’s manifestations and the reasonableness of the third party’s reliance.’ ”
Id. at 605 (quoting Askinuk Corp., 214 P.3d at 264).
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The expiration notice was sent on DNR’s official stationery; it was sent
following DNR’s on-site inspection of White’s drilling activity on December 31, 2008;
and most importantly, as the second hearing officer found, it was “not unreasonable” for
White to rely on the notice when he ceased drilling and removed his equipment from the
well site. The hearing officer’s unchallenged finding leads us to the conclusion that the
DNR employee who signed the expiration notice had at least the apparent authority to
do so.
Finally, DNR argues that the expiration notice could not be an anticipatory
breach because the lease provided that such a notice could be appealed.21 But the right
to appeal does not change the nature of the act from which the appeal is taken. A breach
can be cured, but that does not mean it was never a breach.
2. DNR’s breach was material.
Whether DNR’s breach was material is another question. Although the
agency hearings were the only forums for fact-finding in these administrative
proceedings, they resulted in no specific findings on materiality. On the first superior
court appeal, however, the court assumed that DNR had materially breached the lease
before going on to consider whether DNR cured the breach through reinstatement. On
the second superior court appeal, the court expressly decided that “DNR’s breach was
material. . . . An unjustified, outright cancellation of a contract cannot be other than a
‘material breach.’ ”
21
Paragraph 25(c) of the lease allows White, as the first step in the
administrative appeal process, to appeal a notice within 30 days of its receipt. See 11
AAC 02.010(e) (incorporating appeal period “set by 11 AAC 02.040”); 11 AAC
02.040(a) (setting appeal deadline of 20 days “unless another period is set by . . . [an]
existing contract”).
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We agree with the superior courts’ view that DNR’s breach was necessarily
material. DNR correctly points out that whether a breach is material is a question “of
degree, centering on the reasonable expectations of the parties, and a material breach is
one that will or may result in the other party not receiving substantially what that party
bargained for.”22 And ordinarily the question of materiality must be left to the fact­
finder.23 But in some cases the breached provision is so obviously central to the purpose
of the contract that materiality can be determined as a matter of law.24 We conclude that
22
See RESTATEMENT (SECOND) OF CONTRACTS § 241 (AM. LAW INST. 1981)
(listing circumstances that are “significant” to “determining whether a failure to render
or to offer performance is material,” including “the extent to which the injured party will
be deprived of the benefit which he reasonably expected”; “the extent to which the
injured party can be adequately compensated” for the lost benefit; the extent to which the
non-breaching party “will suffer forfeiture”; the likelihood that the non-breaching party
“will cure his failure, taking account of all the circumstances including any reasonable
assurances”; and “the extent to which the behavior of the party failing to perform or to
offer to perform comports with standards of good faith and fair dealing”).
23
See Wirum & Cash, Architects v. Cash, 837 P.2d 692, 708 (Alaska 1992)
(remanding for superior court to “enter additional findings and conclusions as to whether
[partner’s] various breaches [of fiduciary duties] were material breaches of the parties’
contract” excusing other partner’s performance); 14 RICHARD A. LORD, WILLISTON ON
CONTRACTS § 43.6, at 627 (4th ed. 2012) (“[W]hether a nonperformance is sufficiently
material [to suspend or discharge the other party’s duty to perform] is ordinarily an issue
of fact.”).
24
See 23 LORD, supra note 23, § 63.3, at 485 (“Nevertheless, the materiality
of a breach of contract is not always a question of fact, even if the issue is disputed; thus,
if there is only one reasonable conclusion, a court must address what is ordinarily a
factual question as a question of law.”); cf. Gilbert v. Dep’t of Justice, 334 F.3d 1065,
1071-72 (1st Cir. 2003) (explaining that whether breach is material is mixed question of
law (what contract requires) and fact (what breaching party did); so that “[w]here, as
here, the facts are undisputed, the determination of whether there has been material non­
compliance with the terms of a contract, and hence breach, necessarily reduces to a
(continued...)
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the breach at issue here, resulting in termination of the lease and prompting White to
reasonably suspend his own performance while awaiting reinstatement, affected rights
so central to the parties’ reasonable expectations that it could only be viewed as material.
3. Reinstatement of the lease cured the breach.
The Commissioner retracted the expiration notice and reinstated the lease
in his January 27, 2009 letter. White asserts that the reinstatement letter added new
conditions to the lease, amounting to another breach. It is true that “language that clearly
manifests an ‘intention not to perform except on conditions which go beyond the
contract’ ” may be a repudiation.25 A demand that new conditions be met, even if based
on “an alleged ‘contract interpretation,’ ” may be an anticipatory breach.26
In support of this argument, White refers to the letter’s paragraph that
begins “in summary” and lists four conditions for “the continued extension of the lease”:
“(1) continued drilling of the well; (2) completion of the well by April 27, 2009; (3) valid
24
(...continued)
question of law”); Alaska Interstate Constr., LLC v. Pacific Diversified Invs., Inc., 279
P.3d 1156, 1173 (Alaska 2012) (recognizing rule “that fraud and other forms of
intentional wrongdoing constitute material breaches of contract as a matter of law”).
25
K & K Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 715 (Alaska 2003)
(quoting RESTATEMENT (SECOND) OF CONTRACTS § 250 cmt. b (AM. LAW INST. 1981));
see also 10 JOHN E. MURRAY, JR., CORBIN ON CONTRACTS § 54.15, at 200 (Joseph M.
Perillo ed., rev. ed. 2014) (“If one party to a contract, either willfully or by mistake,
demands of the other a performance to which he has no right under the contract and
states definitely that, unless his demand is complied with, he will not render his promised
performance, an anticipatory breach has been committed. Such a repudiation is
conditional in character, it is true; but the condition is a performance to which the
repudiator has no right.”).
26
Snow v. W. Sav. & Loan Ass’n, 730 P.2d 204, 210 (Ariz. 1986) (en banc)
(quoting United Cal. Bank v. Prudential Ins. Co. of Am., 681 P.2d 390, 430 (Ariz. App.
1983)).
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permits for all operations; and (4) sustained production within 90 days following the
cessation of drilling.” White contends that the first condition — “continued drilling of
the well” — conflicts with lease paragraph 4(e), which gives the lessee a reasonable time
to recommence “operations or production” if the State “directs or approves in writing a
suspension of all operations on or production from the leased area” and then lifts the
suspension. But White sought and was granted the extension under paragraph 4(c)(1),
not paragraph 4(e). And we read paragraph 4, subsections (a) through (f), as addressing
usually distinct circumstances:
* Subsection (a) provides automatic lease extensions while oil or gas is
being produced in paying quantities.
* Subsection (b) provides automatic lease extensions for leases committed
to State-approved unit agreements.
* Subsection (c) provides automatic lease extensions under two scenarios:
(1) if drilling has commenced “as of the date on which the lease otherwise would expire
and is continued with reasonable diligence”; and (2) if the lease was producing “oil or
gas in paying quantities,” production ceases, but “drilling or reworking operations are
commenced . . . within six months after cessation of production and are prosecuted with
reasonable diligence.”
* Subsection (d) addresses leases with wells “capable of producing oil or
gas in paying quantities”; leases encompassing such wells will not expire despite the lack
of production unless the State gives the lessee notice “allowing a reasonable time, which
will not be less than six months after notice, to place the well into production.”
* Subsection (e) addresses leases subject to State orders to suspend
operations or production; lessees have “a reasonable time, which will not be less than six
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months after notice that the suspension has been removed, to resume operations or
production.”
* Subsection (f) addresses leases on which operations or production have
been “prevented by force majeure.”
The circumstances of White’s lease extension fall squarely within
paragraph 4(c), which is why he adamantly — and successfully — argued to DNR for
that provision’s application. White was conducting drilling activities on December 31,
2008, the date the lease would otherwise have expired, and his lease term therefore
extended automatically as long as his drilling activities were “continued with reasonable
diligence.” He did not suspend operations because of a written DNR order that he do so,
as contemplated by paragraph 4(e). Another lease provision gives DNR an apparently
broad authority to “from time to time direct or approve in writing suspension of
production or other operations under this lease.” But a suspension implies a mere
interruption in performance, not an end to it,27 and fitting this case within the framework
of paragraph 4(e) thus cuts against White’s central argument that the January expiration
notice terminated his lease. Indeed, White argues inconsistently on this appeal that
“DNR did not suspend operations on [the lease], they terminated it.”
Moreover, subsections 4(c) and (e) cannot reasonably be read as governing
the same situation simultaneously. Paragraph 4(c) requires that the lessee “continue[]
with reasonable diligence” the drilling activities engaged in on the last day of the lease
term (emphasis added); paragraph 4(e) allows the lessee “not . . . less than six months
27
“Suspend” means “[t]o interrupt; postpone; defer,” or “[t]o temporarily
keep (a person) from performing a function . . . or exercising a right or privilege.”
BLACK’S LAW DICTIONARY (10th ed. 2014).
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after notice” to resume such activities, having discontinued them because of the
suspension order.
Addressing the second condition in DNR’s reinstatement letter —
“completion of the well by April 27, 2009” — White contends that it conflicts with the
language of paragraph 4(c)(1) that automatically extends the lease for as long as the
lessee continues drilling activities “with reasonable diligence.” The State counters that
the reinstatement letter “simply voiced a reasonable interpretation of when drilling with
‘reasonable diligence’ would be complete as provided in the lease”; in other words,
diligent effort that fails to complete the well by April 27 could not, in the
Commissioner’s view, be “reasonable.” We agree with White that a fixed deadline
seems inconsistent with a flexible, fact-based completion standard like the contractual
term “with reasonable diligence”; a lessee acting “with reasonable diligence” could fall
short of a fixed deadline for a variety of reasons.28
On the other hand, we must give some deference to the Commissioner’s
decision as to what constitutes “reasonable diligence” in this highly specialized context.
Although the interpretation of a contract presents a question of law, we review questions
that necessarily involve agency expertise under the “reasonable basis” test, “giving
deference to the agency’s specialized knowledge and expertise.”29
28
See Diligence, BLACK’S LAW DICTIONARY (10th ed. 2014) (defining
“reasonable diligence” as “[a] fair degree of diligence expected from someone of
ordinary prudence under circumstances like those at issue”).
29
Alaska Fish & Wildlife Conservation Fund v. State, Dep’t of Fish & Game,
Bd. of Fisheries, 289 P.3d 903, 912 n.31 (Alaska 2012) (quoting Alaska Exch. Carriers
Ass’n v. Regulatory Comm’n, 262 P.3d 204, 208-09 (Alaska 2011)).
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Here, the Commissioner explained his interpretation of the “reasonable
diligence” standard in his June 10, 2009 decision on White’s request that DNR
reconsider the reinstatement letter. The Commissioner recited White’s description of the
activities he had already done to prepare the well for drilling, including completion of
a “120 foot water well with a pump to provide water” and the staging of “the workover
rig, blow out preventer, mud tanks, drill pipe and other major equipment necessary and
incidental to reach the proposed bottom hole location.” The Commissioner noted his
reliance on paragraph 4(c)(1) of the lease and the legal sources from which it was
derived, AS 38.05.180(m) and 11 AAC 83.125, as well as the lease’s expansive
definition of “drilling.” He explained that the April 27 deadline — 90 days from the date
of the reinstatement letter — had been extrapolated from “White’s Plan of Operations,
which stated that it would take 30 days to complete this well.”30 The Commissioner
trebled White’s own estimate. This interpretation, the Commissioner summarized, was
based on “the lease language consistent with the terms set forth in state law, in paragraph
4 of the lease and Mr. White’s own representations about his plans.”
The Commissioner correctly observed that the contractual “reasonable
diligence” standard is drawn directly from statute and regulation: AS 38.05.180(m)31 and
30
The lease required that the plan of operations set out “the sequence and
schedule of operations to be conducted[,] including the date operations are proposed to
begin and their proposed duration,” and that the plan be submitted and approved “before
any operations may be undertaken.”
31
“If drilling, including operations such as redrilling, sidetracking, or using
other means necessary to reach the originally proposed bottom hole location, has
commenced on the expiration date of the primary term of the lease and is continued with
reasonable diligence, the lease continues in effect until 90 days after drilling has ceased
and for so long thereafter as oil or gas is produced in paying quantities.”
(continued...)
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11 AAC 83.125.32 In Alaskan Crude Corp. v. State, Department of Natural Resources,
Division of Oil & Gas, we considered what standard of review applied to the
interpretation of a force majeure clause.33 The parties disputed whether the agency
applied the force majeure clause from the oil and gas lease or the unit agreement: if it
was from the lease it was subject to de novo review as a matter of contract interpretation,
but if it was from the unit agreement it was subject to deference as the agency’s
interpretation of its own regulation.34 We concluded that the agency applied the force
majeure clause from the unit agreement and its decision was subject to deference because
“[t]he definition of force majeure [in] the unit agreement is contained in DNR
regulations.”35 In this case, similarly, we conclude that the Commissioner strived in his
reconsideration decision to interpret the contractual term “reasonable diligence”
consistently with its sources in statute and regulation. We conclude that, as in Alaskan
Crude, the Commissioner’s interpretation of the “reasonable diligence” standard was “an
31
(...continued)
AS 38.05.180(m) (emphasis added).
32
“If drilling, including redrilling, sidetracking, or other means necessary to
reach the originally proposed bottom hole location, has commenced on or before the
expiration date of the primary term of the lease and is continued through that date with
reasonable diligence, the lease will continue in full force until 90 days after the drilling
has ceased and for so long after that date as oil or gas is produced in paying quantities.”
11 AAC 83.125(a) (emphasis added).
33
261 P.3d 412, 419 (Alaska 2011).
34
Id.
35
Id. (citing 11 AAC 83.395(3)).
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interpretation of the agency’s own regulations and the deferential reasonable basis
standard applies.”36
Relatedly, we have also applied the reasonable basis standard to terms that
are flexible and evolving rather than immutable and subject to one fixed definition, and
thus more susceptible to determination as a matter of law. In ConocoPhillips Alaska,
Inc. v. State, Department of Natural Resources, we held that “the crucial question” for
us in interpreting a regulatory standard incorporated into an oil and gas lease was
“whether this standard describe[d] a fixed and immutable test” — which “might well
present a pure question of law to be decided de novo” — or whether it described instead
“a more flexible process . . . grounded in the department’s exercise of discretion and
expertise and having the capacity to evolve as contemporary scientific knowledge
advances,” in which case our review “would need to be appropriately deferential.”37
Finding that the standard was flexible and evolving, we deferred to the Commissioner’s
interpretation of it.38 The concept of “reasonable diligence” in the context of well-
drilling activities strikes us as flexible enough to require similarly deferential review.
In support of the Commissioner’s interpretation we note that the
reinstatement letter advised White not only that he had an additional 90 days to complete
the well or face “automatic termination of this lease” but also that after 90 days DNR
would “review [White’s] progress to determine whether continued lease extension [was]
36
Id.
37
109 P.3d 914, 920 (Alaska 2005).
38
Id. at 921-23.
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warranted.”39 We note also that White continued to have the protection of the force
majeure clause in paragraph 4(f) of the lease, by which he could seek further extensions
if his failure to meet the April 27 deadline was due to causes “beyond [his] reasonable
ability to foresee or control.”40 Under our deferential standard of review, we conclude
that the Commissioner’s decision that White could complete drilling within 90 days —
by April 27, 2009 — if he exercised “reasonable diligence” has a reasonable basis in the
facts, the terms of the lease, and the law; we therefore do not disturb it.
White also challenges the reinstatement letter’s third condition — “valid
permits for all operations” — as allowing DNR to terminate the lease “on the erroneous
basis that the Lessee [does] not have a valid drilling permit.” But he does not argue that
a requirement of “valid permits” is inconsistent with the lease; indeed, any permit
required by statute or regulation is also required by the lease, which is expressly made
“subject to all applicable state and federal statutes and regulations in effect on the
effective date of this lease” and, “as is constitutionally permissible,” laws enacted later
as well.
Finally, White challenges the last condition — “sustained production within
90 days following the cessation of drilling” — as contrary to lease paragraph 4(d), which
allows a lessee “a reasonable time, which will not be less than six months after notice,”
39
See K & K Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 715 (Alaska
2003) (“[T]o be an anticipatory breach based on a request for additional conditions, ‘the
request must be coupled with an absolute refusal to perform unless the request is
granted.’ ” (quoting 17A AM. JUR. 2d Contracts § 738, at 752 (1991))).
40
See 11 AAC 83.395(3) (“ ‘[F]orce majeure’ means war, riots, acts of God,
unusually severe weather, or any other cause beyond the unit operator’s reasonable
ability to foresee or control and includes operational failure to existing transportation
facilities and delays caused by judicial decisions or lack of them.”).
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to place into production “a well capable of producing oil or gas in paying quantities.”
But as explained above, the subsections of paragraph 4 address different circumstances,
and White’s circumstances, as he argued consistently himself, fit paragraph 4(c)(1): that
is, as long as his drilling activities were “continued with reasonable diligence, [the] lease
[would] continue in effect until 90 days after cessation of that drilling and for so long as
oil or gas [was] produced in paying quantities.” Paragraph 4(d) addresses wells that are
already “capable of producing oil or gas in paying quantities.” A lessee with such a
well, but who is not producing, has at least six months to commence production once
DNR gives notice that production is required. But White has no such well under the
lease here at issue. A lessee like White — who extends the lease term by drilling
activities on the last day of the term — must continue drilling “with reasonable
diligence,” must commence production within “90 days after cessation of that drilling,”
and will maintain the lease only “for so long as oil or gas is produced in paying
quantities.” The reinstatement letter’s fourth condition merely restates the requirements
of lease paragraph 4(c)(1), the provision governing White’s extension.
We conclude that the Commissioner did not err when he decided that the
reinstatement letter did not impose new conditions on DNR’s continued performance
under the lease but rather interpreted or applied the lease’s terms.
3. DNR’s termination of the lease was supported by substantial
evidence.
Because we conclude that DNR’s January 2009 breach was cured by
reinstatement, we next consider whether DNR was justified in terminating the lease in
July. White argues that DNR’s justifications for termination — lack of both a valid
drilling permit and drilling activity — were flawed. In White’s first superior court
appeal, the court agreed with White about the valid drilling permit, concluding that it did
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not justify termination as long as the validity was the subject of a pending administrative
appeal with AOGCC. But on remand the Commissioner relied solely on White’s failure
“to drill with reasonable diligence.” On appellate review, our task is to determine
whether the Commissioner had substantial evidence to support the finding that White did
not drill with reasonable diligence.41
We conclude that the Commissioner’s decision is adequately supported.
His decision related the following facts. On December 31, 2008, DNR’s representative
at the drill site observed some activities short of “actual boring” that nonetheless
qualified as “drilling activities” sufficient to extend the lease term. On January 2, 2009,
upon receipt of the notice of expiration, White demobilized his equipment and removed
it from the well site to “hard ground.”42 A few weeks later, in the midst of White’s
attempts to have the expiration notice retracted, DNR personnel observed other “activity
[at the site] that could be associated with drilling, but did not observe the drill bit actually
boring in the well or actual operation of the drill rig and systems in the act of drilling.”
The Commissioner noted that by April, White’s “drill rig had been located to Kenai.”
41
“We review the agency’s factual findings using the substantial evidence
standard. ‘Substantial evidence is defined as such relevant evidence as a reasonable
mind might accept as adequate to support [the agency’s] conclusion.’ ‘We determine
only whether such evidence exists and do not choose between competing inferences or
evaluate the strength of the evidence.’ ” Alaskan Crude Corp. v. State, Alaska Oil & Gas
Conservation Comm’n, 309 P.3d 1249, 1254 (Alaska 2013) (quoting Lopez v. Adm’r,
Pub. Emps.’ Ret. Sys., 20 P.3d 568, 570 (Alaska 2001) (alteration in original))).
42
We note that paragraph 21 of the lease gave White “a period of one year
after the termination, or any extension of that period as may be granted by the state, to
remove from the leased area or portion of the leased area all machinery, equipment,
tools, and materials.”
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The Commissioner found that “the 25 days lost [between the expiration
notice and the lease reinstatement] were not critical to the overall capacity to drill on the
site.” The Commissioner did note, however, that White had a fairly small window of
opportunity between reinstatement and thaw in order to remobilize, but he found that
White made no productive use of this window, choosing to focus his efforts “on
litigation rather than a resumption of activities.” White testified that “following
reinstatement he did take steps to assess the rental costs of trucking and other costs to
move drilling equipment back to the site,” as well as the availability of truck drivers for
that purpose. But the Commissioner noted that White’s decision to focus on litigation
was a “strategic choice” that banked — ultimately unsuccessfully — on the courts
accepting White’s contract-interpretation arguments over DNR’s. The Commissioner
noted further that litigation activity is not a “drilling activity” as defined in the lease.
White does not dispute that he chose litigation over a resumption of drilling
activities; he testified that after reinstatement of his lease he “did not perform any further
work other than the preliminary mobilization process to re-mobilize and transport that
equipment back out . . . .” We conclude that substantial evidence supports the
Commissioner’s decision that White did not continue drilling “with reasonable
diligence” when he had the opportunity to do so, and that he therefore failed to satisfy
the requirements for a continued lease extension under paragraph 4(c)(1).
B. There Is No Agency Decision on Damages For Us To Review.
White urges us to hold that the superior court should have remanded the
case to the agency for a determination of his damages; he urges us to order such a
remand. DNR asks us not to consider White’s claim because his cross-appeal was
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untimely43 and he waived the issue of damages. Our holding that the initial breach was
cured by the reinstatement letter moots any claim for damages following reinstatement.
But the issue remains whether White is entitled to damages incurred between the
January 2, 2009 expiration notice and the reinstatement 25 days later.44
However, there is no agency decision on damages for us to review. Oil and
gas lessees are required, at least initially, “to pursue” “all grievances through
administrative remedies.”45 When filing an appeal or request for reconsideration, the
appellant must “specify the remedy requested.”46 In this case, at every step of the
administrative appeal process White asked only that DNR reinstate the lease. He had
repeated opportunities in the successive administrative proceedings to present evidence
of his damages, or at least to assert a right to a separate hearing on the issue.47 But
43
We conclude that the timing of White’s pro se cross-appeal indicated a
good-faith effort to comply with the appellate rules based on reasonable confusion about
their requirements, and we therefore consider it. See Conitz v. Alaska State Comm’n for
Human Rights, 325 P.3d 501, 506 (Alaska 2014).
44
See RESTATEMENT (SECOND) OF CONTRACTS § 236 cmt. b (AM. LAW INST.
1981) (“[E]very breach gives rise to a claim for damages.”).
45
White v. State, Dep’t of Nat. Res., 14 P.3d 956, 960 (Alaska 2000) (citing
11 AAC 88.155); Danco Expl., Inc. v. State, Dep’t of Nat. Res., 924 P.2d 432, 434
(Alaska 1996) (“Oil and gas lessees and lease bidders which have grievances with the
State must pursue the administrative procedures provided by 11 AAC 02.010, et seq.”).
46
11 AAC 02.030(a)(10).
47
For example, in February 2009 the Commissioner, responding to White’s
request for reconsideration of the reinstatement letter, invited him to “submit additional
written material or request a hearing,” but White declined, stating “I do not believe that
an additional briefing or hearing is necessary in order for you [to] decide this issue.” At
the first administrative hearing on the termination, White’s counsel stated: “We do not
(continued...)
-27- 7283
although White made references to “being damaged,” experiencing “undue financial
harm” and “escalating” costs, and losing opportunities to sell gas, he never specifically
demanded money damages for these alleged harms.
It is up to DNR in the first instance to determine whether White has waived
any right to recover damages. On the appellate record, however, we see no basis on
which to conclude that he was deprived of a right to seek damages in the administrative
proceeding or that the superior court erred when it failed to remand for further
proceedings on that issue.
V. CONCLUSION
We REVERSE the superior court’s decision reinstating the lease and
AFFIRM the Commissioner’s decision terminating the lease.
47
(...continued)
plan on putting any additional evidence on . . . .” At the second administrative hearing
following the superior court’s remand, White testified that he could prove the costs
incurred in demobilizing the well site and the damages from lost opportunities to export
gas, but he provided no evidence in support of the claim and waived the opportunity to
file a post-hearing brief.
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