The Oil and Gas Addendum

A great deal of infrastructure is needed to move oil and gas from their reservoirs thousands of feet below the ground to the places where these hydrocarbons are bought and sold. Wells must be drilled. Pipelines must be installed. Compressor stations must be built. But, what happens if there is a payment dispute between the driller or pipeline operator and the contractors hired to build and construct these facilities? Could your property be at risk under the Pennsylvania Mechanics’ Lien Law?

Unfortunately for Pennsylvania landowners, drilling and pipeline projects have been the subject of Mechanics’ Lien Claims. This continues to cause anxiety for property owners who have well-pads, pipelines and other facilities erected on their property. Can the landowner’s property be subject to these remote liens? Can the landowner be responsible for paying a pipeline contractor that he never met and has no knowledge of? There is no simple or clear answer to these questions but these authors submit that applying common-sense to existing Pennsylvania law should insulate landowners and their property from liens filed by drilling and pipeline contractors and suppliers.

What is the Pennsylvania Mechanics’ Lien Law?

The Pennsylvania Mechanics’ Lien Law of 1963 (49 P.S. § 1101 et seq) is a powerful tool for construction contractors and related professionals to ensure that they are paid for their work. Essentially, the Mechanics’ Lien Law provides a mechanism for those who have performed work related to an “improvement” to attach a lien against the property that was improved in order to secure payment for unpaid amounts. Though the Mechanics’ Lien Law provides great utility for contractors and subcontractors looking to secure payment, its application is limited to specific situations and is highly dependent on the facts of the particular construction project.

“Who” is Subject to the Mechanics’ Lien Law?

The first step in gaining familiarity with the Mechanics’ Lien Law involves understanding “who” the law applies to. The law governs interactions between three types of people: the “owner”, the “contractor” and the “subcontractor”. Each of these roles is defined in the law.

• The “Owner” is defined in the law as “an owner in fee, a tenant for life or years or one having any other estate in or title to property.”
• A “contractor” or a “subcontractor” is one who “erects, constructs, alters or repairs an improvement or any part thereof or furnishes labor, skill or superintendence thereto; or supplies or hauls materials, fixtures, machinery or equipment reasonably necessary for and actually used therein.” This is a fairly expansive definition and can include contractors or engineers who supply drawings or provide supervision.
• The difference between a “contractor” and a “subcontractor” is that the “subcontractor” is hired by the “contractor”.

49 Pa. Stat. Ann. § 1201(3),(4),(5). As we will discuss later in this article, these simplistic definitions do not align well to the realities of oil and gas infrastructure development.

“What” Does the Mechanics’ Lien Law Apply To?

Section 301 of the Mechanics’ Lien Law describes the scope of what may be subject to a Mechanics’ Lien Claim:

General Rule. Except as provided under subsection (b), every improvement and the estate or title of the owner in the property shall be subject to a lien, to be perfected as herein provided, for the payment of all debts due by the owner to the contractor or by the contractor to any of his subcontractors for labor or materials furnished in the erection or construction, or the alteration or repair of the improvement, provided that the amount of the claim, other than amounts determined by apportionment under section 306(b) of this act, shall exceed five hundred dollars ($500).

49 P.S. § 1301(a) (emphasis added). This statutory definition does not provide great detail or context. In the oil and gas realm, two critical questions arise. First, what is an “improvement” and second “what is the “estate or title of the owner” that is subject to a mechanics’ lien?

An “Improvement”

The Mechanics’ Lien Law applies to work performed by a contractor or a subcontractor that is an “improvement” to the land. An “improvement” is defined very broadly in the law to include:

any building, structure or other improvement of whatsoever kind or character erected or constructed on land, together with the fixtures and other personal property used in fitting up and equipping the same for the purpose for which it is intended.

49 P.S. § 1201(1). Work that is directly related to or incidental to the “improvement”, like excavation and grading, can potentially result in a valid lien claim as well. Whether a contractor or subcontractor can proceed under the Mechanics’ Lien Law related to a particular type of work is the subject of frequent dispute and is very fact specific.

In general, the construction of a building or improvement on the land, and any work incidental to that is often considered to fall within the scope of the Mechanics’ Lien Law. Sampson-Miller Assoc. Cos., v. Landmark Realty Co., 303 A.2d 43, 45 (Pa. Super. Ct. 1973); Morehall Contracting Co. v. Brittany Estates Ltd. P’ship, 578 A.2d 508, 510 (Pa. Super. Ct. 1990); Wendt & Sons ex rel. Wendt v. New Hedstrom Corp.,858 A.2d 631, 636-37 (Pa. Super. Ct. 2004). On the other hand, earth movement that is independent of or unrelated to any building or improvement on the land is generally not considered to fall within the scope of the Mechanics’ Lien Law. Sampson-Miller Assoc. Cos., 303 A.2d at 45. To show how the law can result in hair splitting, consider Yellow Run Coal Co. v. Yellow Run Energy Co., 420 A.2d 690, 691 (Pa. Super. Ct. 1980) where the Pennsylvania Superior Court concluded that a strip mine would not qualify as an “improvement” under the Mechanics’ Lien Law because coal was merely removed from the surface of the ground, versus a deep mine where structures would be constructed to access and remove the coal. Different types of mining – different results under the law.

So, is Oil and Gas Infrastructure an “Improvement”?

The current Mechanics’ Lien Law dates from 1963 ( the “1963 Act”) and does not provide specific examples of “improvements”. So, the text of the law itself does not say anything about well-pads, compressor facilities, access roads or pipelines. However, this is not the end of the analysis. This 1963 Act was not the first iteration of a mechanic’s lien law in Pennsylvania. As early as 1901, Pennsylvania had a law regarding mechanics’ liens. That law from 1901 was repealed, but it is relevant to the current debate regarding the applicability of the 1963 Act to modern drilling operations and projects.

The 1901 version of the law identified a number of types of structures that fell within its scope, including a “mine”, a “derrick”, a “pipe-line” and a “well for the production of gas, oil or other volatile or mineral substance” to be subject to be subject to potential mechanics’ lien claims. [Act of June 4, 1901 (P.L. 431)]. After the 1963 Act was passed, commentary was prepared to provide more detail or context on the law and how it worked. A 1964 Comment to the current Mechanics’ Lien Law reported that “[t]he detailed enumeration of the types of structure or improvements . . . contained in the Act of 1901 is omitted and the phrase ‘structure or improvement of whatsoever kind and character’ which is taken verbatim from Section 1 of the Act of 1901 is adopted as generic definition. This is not intended to abridge or to enlarge the right to lien.” 49 P.S. § 1201 [Comment].

While this Comment does not have the force of law, it does provide context and guidance about why the 1963 Act was drafted in this form. It would appear from this commentary that a reasonable interpretation of the 1963 Mechanics’ Lien Law definition of “improvements” would include items that were previously specifically enumerated back in 1901. That would include a well or a pipeline. There is scant case law on this precise topic.

To gain some understanding of the contours of the Mechanics’ Lien Law in the oil and gas world, the 2016 case of Stingray Pressure Pumping, LLC v. EQT Prod. Co., No. CV 16-279 (W.D. Pa. Dec. 21, 2016) from the U.S. District Court for the Western District of Pennsylvania is worth examining. There, Stingray entered into a Master Services Agreement with EQT to “furnish labor and materials to complete well sites.” After $1.6 million in payment was allegedly withheld, Stingray filed a Notice of a Mechanics’ Lien Claim associated with 3 wells in Washington County, Pennsylvania where it performed the work for EQT. In its Notice, Stingray described that it “performed labor and furnished material, machinery and supplies . . . in connection with drilling and/or operation” of the 3 wells subject to its Claim. Stingray also appended invoices to its Claim for its like a “stimulation charge: and “remote data transmission”. Id.

EQT moved to dismiss the action, essentially arguing that Stingray’s work did not satisfy the parameters of the Mechanics’ Lien Law. While the District Court observed that a gas well has been found to fit within the parameters of the Mechanics’ Lien Law, the court took issue with Stingray’s pleading, writing that it failed to give an indication about what Stingray actually did. The District Court further noted that an oil or gas well can only be the proper subject of a Mechanics’ Lien if the labor was supplied for the “erection, construction, alteration or repair of a building or other permanent structure.” Id. Along these lines, the court concluded that invoices showing “charges for items such as water, sand, ‘stimulation charge’, ‘remote data transmission’, ‘pump down e-line service’, ‘goat head charge’ and ‘safety shower'” did not provide enough information for the court to determine if the work subject to the claim was connected to the construction of a permanent structure. Id.

Taking all of these concepts together, it appears that some operations related to well drilling or pipeline installation may fall within the scope of the Mechanics’ Lien Law, but merely working on these projects does not entitle a contractor to a lien. It seems that oil and gas activities will be subject to the same case-by-case scrutiny as other Mechanics’ Lien claims to determine whether the work subject to the claim fits within the limits of the statute.

What Property is Subject to a Claim?

The rigid structure and simplistic concepts of the Mechanics’ Lien Law are poorly adapted to oil and gas matters. This is troublesome for property owners dealing with oil and gas infrastructure on their land, because the text of the 1963 Act does not match the reality of how these projects are performed. Common-sense should carry the day over blind application of the language in the statute.

We know from the definitions referenced above that Mechanics’ Lien claims are filed against the improvement and the land on which the improvement sits. We also know that the Mechanics’ Lien Law effectively presumes that the “owner” of a property is the one who actually hired the contractors or subcontractors who performed the work and erected the improvement. But, in the oil and gas context, this is rarely true.

In many instances, a pipeline operator has acquired a pipeline right of way agreement from the owner of the land that defines the easement location where the pipeline operator can install the pipeline. Once that agreement is signed, the property owner has transferred all rights and control for the planning, installation and operation of that pipeline in that particular right of way over to the pipeline operator. The pipeline operator then hires contractors (and subcontractors) to perform the work. In many instances, these pipelines simply pass through the property and are unrelated to any development on the property itself.

Just the same, in an oil and gas lease, a mineral owner grants the development rights to the driller and, if oil and gas is found in economically viable quantities, the driller obtains a fee simple determinable ownership interest in that oil and gas. See, Brown v. Haight, 255 A.2d 508 (Pa. 1969). The mineral owner has no control over how wells are drilled, the contractors that are hired or how the contractors are paid. The contractors all work for the driller, which will retain the overwhelming majority of the proceeds of development. Worse yet, wells may be located on property where the surface owner does not own the oil and gas.

The text of the Mechanics’ Lien Law does not address easements or rights of way. It does contain a provision relating to lease interests, but this is geared toward a traditional landlord/tenant relationship:

No lien shall be allowed against the estate of an owner in fee by reason of any consent given by such owner to a tenant to improve the leased premises unless it shall appear in writing signed by such owner that the erection, construction, alteration or repair was in fact for the immediate use and benefit of the owner.

49 P.S. § 1303(d). This logic cannot be readily extended into the oil and gas lease arena because it has been recognized that traditional landlord/tenant concepts do not adequately address the relationship between oil and gas lessors and lessees. See, Tayfur v SWEPI LP, Case No. 14-3478 (3d. Cir. 2015).

It seems that there is a gap in the provisions of the Mechanics’ Lien Law and the realities of how modern oil and gas operations are conducted. While the property owner for a pipeline or a well- pad may own the land where that infrastructure is located, these “owners” are not responsible for the work that is performed and have no part in the payment dispute that could give rise to a Mechanics’ Lien claim. Just the same, a landowner signs a lease with a driller, but has no control over the means and methods utilized by the driller to drill the wells, hire the contractors or pay the contractors.

These authors submit that in the oil and gas context, the “owner” is most appropriately considered to be the individual or entity that holds and controls the development or extraction rights that are the subject of the payment dispute and potential lien claim. While this may technically be a “lessee” or an entity that holds an easement or right of way interest, the reality is that these are most likely the real parties to the dispute giving rise to the claim. With this, the property subject to the lien should be limited to the interest of the party that holds the development or extraction rights. In other words, the actual well or pipeline and nothing more. A lien should not extend beyond a pipeline operator’s interest in a right of way across the land and it should not extend beyond a driller’s interest in the well or well pad that gave rise to the payment dispute. The landowner’s property should not be subject to the lien.

What Should Landowners Do?

The Mechanics’ Lien Law is a powerful tool that should be limited in scope and effect. This, however, does not stop a contractor or subcontractor from potentially casting the widest net possible to make sure that they are paid for work performed on a particular project. All Mechanics’ Lien claims should be taken seriously – even if you receive a Notice associated with companies that you have never heard of. While it may seem unreasonable for your property to be subject to a lien related to a payment dispute you had no part in, you cannot assume that the issue will resolve itself. Given the intricacies of the Mechanics’ Lien Law, it is important that you contact legal counsel familiar with these issues to ensure that your rights are protected if you receive Notice of a Mechanics’ Lien claim.