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Knox Energy, LLC v. Gasco Drilling, Inc.

United States District Court, W.D. Virginia, Abingdon Division

October 16, 2014

KNOX ENERGY, LLC, Plaintiff,
v.
GASCO DRILLING, INC., Defendant

J. Scott Sexton, H. David Gibson, Michael J. Finney, and Abigail E. Murchison, Gentry Locke Rakes & Moore, LLP, Roanoke, Virginia, for Plaintiff and Counterclaim Defendants.

Thomas R. Scott, Jr., Benjamin A. Street, and Jason D. Gallagher, Street Law Firm, LLP, Grundy, Virginia, for Defendant and Counterclaim Plaintiff.

Page 490

OPINION AND ORDER

James P. Jones, United States District Judge.

In this breach of contract action arising under Virginia law, the party alleged to have breached the contract moved at trial for judgment as a matter of law. The parties argued their positions and I announced my intention to grant the oral motion and then discharged the jury. This opinion sets forth my basis for granting the motion. In summary, I find that there was insufficient proof of mutual assent to the contract sued upon and thus it is unenforceable as a matter of law.

I.

Knox Energy, LLC, a natural gas producer, filed this action seeking a declaratory judgment that no contractual relationship existed between it and Gasco Drilling, Inc. (" Gasco" ), a gas drilling company.[1] Gasco in turn filed a Counterclaim against both Knox Energy, LLC, and an additional party, Consol Energy, Inc.[2] In its Counterclaim, Gasco sought recovery of over $14 million under an expired drilling contract that Gasco claimed had been resurrected by a form agreement mistakenly sent to Gasco. Without objection, I ruled prior to trial that Gasco would be treated as a plaintiff and had the burden of proof as to the existence of an enforceable contract.

The essential facts of this case are largely uncontested. Gasco presented its case-in-chief at trial through the testimony of three witnesses: Clyde B. Ratliff (" Ratliff" ), Gasco's CEO and principal owner; Freda Rasnake (" Rasnake" ), Ratliff's clerical assistant; and Todd M. Shumaker (" Shumaker" ), Knox/Consol's Director of

Page 491

Contract Services. The testimony of Gasco's three witnesses and the exhibits admitted during that testimony are the basis for the court granting Knox/Consol's motion for judgment as a matter of law.

Gasco is a family owned and operated gas drilling company that has been in business since the late 1980s. Gasco has had business dealings with Knox/Consol, a natural gas producer, since the early 1990s. During this period, the parties have entered into numerous contracts for the drilling of gas wells.

Ratliff, Gasco's CEO, exercises exclusive control over the execution of drilling contracts entered by Gasco. In contrast, no single individual exercises exclusive contracting authority for Knox/Consol. Ratliff has negotiated drilling contracts with various individuals exercising contracting authority on behalf of Knox/Consol during the course of the parties' relationship.

The first critical event occurred in June 2008 when the parties entered into a written contract for well drilling services to begin on July 7, 2008 (" 2008 Drilling Contract" ). The term of the 2008 Drilling Contract was stated to be " until drilling operations are completed . .., or for a term of 2 years." (Countercl. Pl.'s Trial Ex. 1 § 6.1, ECF No. 264-2.)

Pursuant to the 2008 Drilling Contract, Gasco was hired to provide drilling services at undefined sites throughout eastern Tennessee, eastern Kentucky, and, at times, in Virginia and northern West Virginia. Gasco was also obligated to have two drilling rigs and associated equipment available for use during the term of the 2008 Drilling Contract.

In compensation for providing drilling services, Knox/Consol was required to pay Gasco for each drilling rig at work on horizontal gas drilling, either $13,500 or $12,000 per day, depending upon whether the drilling was performed with or without pipe. In addition, Knox/Consol had to pay Gasco a per-foot fee during vertical drilling, prior to the horizontal drilling work.[3]

Central to Gasco's claim, it was also entitled to a standby rate of $10,800 per day for each drilling rig at all times when drilling was not being performed. This standby rate was unique in that it was in the form of a " take or pay" provision, entitling Gasco to a minimum of 328 days of compensation per year. In short, Gasco was guaranteed 328 days of compensation at a minimum daily rate of $10,800 for each of two drilling rigs even if no drilling rig was in service.

The " take or pay" provision of the 2008 Drilling Contract was included in the contract at Knox/Consol's request. At the time, natural gas was at market highs, and the " take or pay" provision ensured that two of Gasco's drilling rigs would be available for use on Knox/Consol's well sites. This provision was so unique that, according to Gasco's CEO Ratliff, Gasco had only entered into two drilling contracts with " take or pay" provisions in the company's history, both of which were signed in 2008.

Following its execution, the parties amended the 2008 Drilling Contract three times following significant drops in the market price of natural gas. On February 17, 2009, the parties agreed to reduce the standby rate under the " take or pay" provision to $6,800 per day. The reduced rate was to remain in effect until Gasco was instructed by Knox/Consol to recommence drilling operations, at which time, the standby rate would revert to $10,800 per

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day. Following this amendment, Gasco recommenced drilling operations for Knox/Consol; however, as an apparent oversight, Gasco never again billed for standby time at a rate of $10,800 per day.

On May 1, 2009, the parties amended the 2008 Drilling Contract again to reduce the compensation rates for Gasco's drilling services. Specifically, the daily drilling rates for drilling with and without pipe were reduced to $12,500 and $11,500, respectively. The vertical footage drilling rate under the contract was also reduced from $22.50 to $20.50 per foot.

The parties' final amendment to the 2008 Drilling Contract was effective May 10, 2010. Pursuant to this amendment, the parties identified two drilling rigs that were actively drilling wells for Knox/Consol in Tennessee, and agreed to release one drilling rig upon completion of an identified well. After completion of the identified well, the parties agreed that Knox/Consol would no longer be obligated under the 2008 Drilling Contract for the released drilling rig. The parties also agreed that the unreleased drilling rig would continue drilling operations on five identified wells. The May 10, 2010, amendment represented the final scope of drilling work performed under the 2008 Drilling Contract.[4] Drilling operations were completed and the 2008 Drilling Contract terminated according to its terms on July 24, 2010.

On June 6, 2011, well after work under the 2008 Drilling Contract terminated, a temporary clerical employee of Knox/Consol emailed Rasnake a onepage form document entitled " Addendum to Contract Purchase Order" (hereafter called the " Addendum" ), which Gasco dated, signed and returned on June 14, 2011. Knox/Consol signed the Addendum and returned a copy to Gasco in July 2011. The Addendum and the events surrounding its execution were the primary issues addressed at trial.

The fully executed Addendum contains the following language:

Addendum to Contract Purchase Order
This Addendum to contract purchase order (" Addendum" ) is entered into effective this 13th day of June, 2011, by and between Consol Energy, Inc. and its affiliates (" Company" ) and Gasco Drilling, Inc. (" Contractor" ).
Whereas, Company and Contractor are parties to a contract purchase order (PO No. 5600000439) (the " Contract Purchase Order" ); and
Whereas, Company and Contractor agree to modify the " Term" provision of the Contract Purchase Order as provided herein.
Therefore, intending to be legally bound, Company and Contractor agree as follows.
1. Company and Contractor agree to modify the " Term" provision of the Contract Purchase Order to read as follows:
Term:
Subject to Company's right to cancel this contract purchase order as set forth below, the term of this agreement shall be for one year from the date set forth above and shall be automatically extended for one year terms unless either party gives written notice to the other

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party of the termination of the agreement at least thirty (30) days before the end of the current one year term.
2. Except for the modification of the " Term" provision as set forth in paragraph 1 of this Addendum, all other provisions of the Contract Purchase Order shall ...

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