In Yoder v. Artex Oil Company (Nov. 13, 2014), Ohio's Fifth District Court of Appeals considered whether an oil and gas lease is subject to a covenant of good faith and fair dealing. While the covenant of good faith and fair dealing is largely recognized in a number of other oil and gas producing jurisdictions, Yoder is only one of a handful of Ohio courts to discuss the subject. The court found that although the oil and gas lease in dispute had disclaimed implied covenants, it was nonetheless subject to a covenant of good faith and fair dealing:
[U]nder Ohio case law, it is well-established that every contract has an implied covenant of good faith and fair dealing that requires not only [21] honesty but also reasonableness in the enforcement of the contract. PHH Mortg. Corp. v. Ramsey, 10th Dist. Franklin No. 13AP-925, 2014-Ohio-3519, 17 N.E.3d 629, ¶ 33 citing Littlejohn v. Parrish, 163 Ohio App.3d 456, 2005-Ohio-4850, 839 N.E.2d 49, ¶ 21 (1st Dist.). "'Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.'" Id. at ¶ 26, quoting Restatement of the Law 2d, Contracts, Section 205, Comment a (1981). Based on the foregoing, it can be logically concluded that an oil and gas lease is a contract, and because it is a contract, an oil and gas lease is subject to the implied covenant of good faith and fair dealing.
The court concluded that it did not need to reach the issue of whether the implied covenant of good faith and fair dealing could be waived as the operator did not breach the covenant under the particular facts of the case. Click here to read the opinion.