If you do business in the oil and gas industry, you know that lawsuits are inevitable. The uncertainties of drilling success, coupled with volatile markets and prices, often spawn disputes that end up with at least the threat of litigation. While you can’t entirely protect your business from lawsuits, there are measures you can take to place your company in a better litigation position, setting yourself up for a better outcome.
While oil prices have been steadily recovering and shale output is on the rebound, 2020 left the industry with plenty of disputes, many related to contractual performance obligations. Implied or ambiguous provisions in contracts and a general lack of precision often lead to litigation when business slows. When the economics of a deal have changed, parties will carefully scrutinize contracts in order to either enforce or excuse performance.
It comes as no surprise that the number one contract issue we have seen over the past year in the oil and gas industry is a force majeure defense, which can negate contractual obligations and related liability because of unforeseeable, catastrophic events. Many contracts specifically exclude pandemics from force majeure clauses, and even when contracts are silent on the possibility of a pandemic, courts may not recognize a force majeure defense. Don’t expect force majeure to release you from contractual obligations.
Inevitably, litigation will continue, and perhaps even increase, as the economy opens up again. Here are some best practices that can help your company reduce risk and minimize the uncertainty of oil and gas litigation.
Early lawsuit mitigation
The following are important steps to take at the outset of a lawsuit or even if your company anticipates litigation:
• If there is a possibility of insurance coverage, put your carrier on notice when you become aware of a potential claim. If the carrier has substantial exposure, it may want to get involved in early legal strategy. Plus, you may increase your chances of avoiding an argument over timely notice and related refusal to cover the cost of defense.
• Key employees need to be informed early of a lawsuit. Put out a formal litigation hold immediately, advising employees not to destroy emails, reports and other relevant documents. A consistent record retention policy is an essential component of any litigation readiness strategy. If records are not preserved, a judge may assume anything lost after your company was aware of a lawsuit was detrimental to the company’s position and may impose sanctions.
• Prepare a timeline of the dispute, along with assembling relevant documents. This will be central to your legal strategy and the timeline of events will assist you with marshaling the facts and developing your strategy. This also will help you determine if any statutes of limitations apply.
Be careful with communications
Once you anticipate a lawsuit, it’s time to lock down your communications. Make sure involved employees know that anything they put in writing will likely be produced in discovery and could negatively impact the company’s position. We recommend a message drafted or reviewed by your lawyer to all pertinent employees that carefully explains limitations on communications. Cases often are won and lost in what is discovered in emails.
Attorney-client privilege is another area where early missteps can handicap litigation. Make sure everyone understands which communications qualify for attorney-client privilege and how the privilege can be compromised by disclosing those communications to someone who is not an attorney. Start by issuing a corporate Miranda warning (also known as an Upjohn letter based on the name of the landmark Supreme Court privilege case), which explains to employees that anything they tell the company’s attorneys remains privileged and confidential at the company’s discretion. The company’s attorneys represent the company – not the employees – and you don’t want to imply anything else. Courts have tossed employee testimony because an employee didn’t understand that the company’s attorney did not represent or protect him or her.
Maintain a good accounting system
When times are good, it is easy for oil and gas companies to become lax with their accounting and recordkeeping, neglecting to fully document expenses, executing handshake deals, skipping over the fine print in contracts and generally prioritizing the work over back-office housekeeping. That is understandable in a cyclical business where producers must push hard when markets are on the upswing, but we often have seen this come back to undermine legal positions in litigation. Good accounting and recordkeeping are essential to placing a value on damages. Put systems in place that maintain discipline in accounting and recordkeeping.
Don’t make emotional business decisions
By nature, energy exploration is an emotional business, as anyone who has ever drilled a dry well or struck unexpected deposits can tell you. We see people get angry and dig in on their positions, especially if they feel they have been taken advantage of by an opposing party. In the end, litigation is just part of doing business, albeit not a pleasant one. Take the personalities out of it and think only in business terms. What is expedient?
Don’t wait to get legal counsel
So many mistakes are made early in litigation before the parties realize that a dispute is going to escalate to a lawsuit. This applies less to a company that has in-house counsel, but we can’t stress how important it is to find agreement on a legal strategy right from the beginning. Don’t wait to consult legal counsel.
What is written here is intended as general information and is not to be construed as legal advice. If legal advice is needed, you should consult your Ireland Stapleton attorney.
About the authors: Kelley B. Duke is an experienced litigator and trial attorney who counsels oil and gas businesses and actively engages in oil and gas litigation in both federal and state courts. She is a director of the Litigation Practice at Ireland Stapleton (Denver, Colo.). She may be reached at [email protected]. Benjamin J. Larson is a director at Ireland Stapleton and a commercial litigator with significant experience in oil and gas litigation. He frequently litigates issues before the Colorado Supreme Court. He may be reached at [email protected].