## Facts

- Arkansas landowners signed oil-and-gas leases granting mineral exploration rights to Arrington in exchange for cash bonus payments.
- Arrington’s landmen presented leases with attached bank drafts stating payment was due “on approval of lease and title” and containing a no-liability clause purporting to relieve liability if the draft was dishonored.
- The landowners returned executed leases; Arrington accepted the leases and provided the bank drafts as the payment mechanism.
- Arrington later dishonored the drafts and did not pay the bonuses.
- Arrington admitted it decided to dishonor all relevant lease agreements in Phillips County for business reasons unrelated to title defects.
- Landowners sued for breach of contract (and alternatively promissory estoppel and unjust enrichment) in federal district court.

## Issues

1. Whether the leases and attached bank drafts, read together, formed enforceable contracts obligating Arrington to pay the bonus amounts.
2. Whether the drafts’ no-liability clause negated mutuality of obligation or otherwise barred enforcement of the lease agreements.
3. Whether the “approval of lease and title” language prevented contract formation or excused payment when Arrington later refused to approve.
4. Whether Arrington could rely on title-approval discretion where it dishonored the drafts for reasons unrelated to title and not in good faith.

## Decision

- The Eighth Circuit affirmed summary judgment for the landowners on breach of contract.
- The court held the leases and bank drafts were part of the same transaction and were construed together as enforceable contracts.
- The no-liability clause in the drafts did not eliminate Arrington’s contractual obligations under the leases.
- The “lease approval” condition was satisfied by Arrington’s acceptance of the executed leases in exchange for the drafts; Arrington could not avoid liability by later withholding approval.
- Arrington’s admitted refusal to pay for business reasons unrelated to title defeated defenses based on title approval and left no genuine dispute that any disapproval was not in good faith.

## Legal Principles

- Instruments executed as part of a single transaction (such as a lease and an attached payment draft) may be construed together to determine the parties’ obligations.
- A payment instrument’s no-liability language will not be interpreted to nullify the substantive exchange in an underlying contract where one party has accepted the counterparty’s performance.
- Contractual “approval” conditions that reserve discretion (including title approval) must be exercised in good faith; the condition cannot be used as a pretext to avoid performance.
- A party’s repudiation for reasons unrelated to the stated contractual condition can preclude reliance on that condition as a defense to breach.

## Conclusion

The court held that Arrington entered binding lease contracts requiring payment of promised bonuses, and neither the drafts’ no-liability clause nor “approval of lease and title” language excused nonpayment where Arrington accepted the leases and then dishonored the drafts for business reasons unrelated to title.


Smith v. Arrington Oil & Gas, Inc., 664 F.3d 1208 (8th Cir. 2012)