Download FOG's Liability in Contracts for Gas Drilling: Breach and Limitation of Liability and more Exams Contract Law in PDF only on Docsity! EXAM#____________ Page 19 of 20 Chuang: Contracts II, Final, SP 11 Part II: Essay (45 points total) Recommended Time: 2 hours NOTE: You must answer all three (3) questions to be eligible for full credit. This examination is intended to test only material covered in our course. Do not discuss matters we have not addressed. THESE FACTS PERTAIN TO ALL QUESTIONS: Freedom Oil & Gas Co. (FOG), an oil and gas development company based in Texas, recently discovered a new method for extracting natural gas from a special type of rock formation, known as shale. With this technology, FOG can extract gas from shale that previously had been unreachable. Marcellus, Pennsylvania, sits on top of the largest shale formation in the United States and is also one of the poorest regions in the state. FOG’s in-house attorneys have prepared a standard contract for FOG sales representatives to use to get landowners’ permission to drill for gas. The ten page document contains a variety of terms and conditions including the following: (1) In return for the rights to drill, Landowner shall be paid $50,000 upon execution of the contract; (2) An additional $500,000 shall be paid to Landowner one year from the date of contract execution, provided that the state government issues FOG the appropriate drilling permit; (3) FOG’s total liability for all claims related to this Agreement, regardless of the form of action or the damage caused or anticipated, is limited to the amount FOG actually paid to the Landowner (this clause #3 was in bold and all caps). QUESTION 1 (the following facts pertain to this question only): On March 1, 2010, FOG executes contracts with a group of Marcellus landowners and pays each $50,000. On June 30, 2010, after further testing, FOG discovers that the shale in Marcellus is unstable and so gas drilling will put FOG employees at higher risk of injury, as well as make the operation less profitable. Instead of telling the Marcellus landowners about this issue, FOG decides that it would be cheaper to just not obtain the drilling permit it needs. This would save FOG both the additional $500,000 payment to each landowner and the expense of preparing the permit application. Normally, it would have taken FOG four days to complete the application (since the application was 100 pages long) and it would generally take the government five days to review and debate the permit. On February 18, 2011, the Marcellus landowners send FOG a letter stating that if FOG did not file for the permit by February 25, 2011, FOG would be in material breach of the contract and the landowners would sue FOG to recover the money owed. FOG’s reply letter stated that if the landowners sued FOG, FOG would view that as repudiation of the agreement. On February 27, 2011, FOG had not yet filed the application and the landowners file suit against FOG in state court on the same day. You are FOG’s in-house counsel. Advise FOG’s executive team regarding whether FOG has to perform under the contract.
