16 minute read
Avoiding Early Mistakes in Oil
Avoiding Early Mistakes in Oil and Gas Litigation
By: Kelley B. Duke and Benjamin J. Larson
Advertisement
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 in-
volved 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 kduke@ irelandstapleton.com.
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 blarson@ irelandstapleton.com.
ESG Finance: An Enterprise-Wide Checklist
By: Mona Dajani, partner and co-leader of global energy, infrastructure & mobility, Pillsbury Winthrop Shaw Pittman Law
In the past decade, Environmental, Social, and Governance (ESG) finance has grown tremendously and is no longer just a passing option for industries looking to redirect capital.
While they might not seem to offer obvious opportunities to the petroleum energy market, ESG programs and products are quickly becoming an expectation for boards and shareholders to show they are still relevant in today’s competitive market. With losses challenging the sector, a new administration feeding the ESG market, and lenders, consumers and investors seeking alternative investment choices, I hear more than ever about ESG finance in my energy and infrastructure practice at Pillsbury Law.
Inherent to the idea is keeping up with what ESG responsibilities are and aren’t. Every Board member or executive trying to improve a score, and every shareholder compiling an ESG portfolio, has many factors to consider. Keeping metrics on a company’s standards is essential, and the Securities and Exchange Commission, Commodity Futures Trading Commission and other regulatory bodies are adding additional pressure for companies to show higher levels of transparency.
Three places to start:
• Diversity is a must. Boards need diverse members with appropriate ESG skills to make sure their companies’ strategies are sustainable and relevant.
• Consider green bonds. Boards should consider issuing green bonds to fund sustainable projects and access ESG capital. • Be able to measure your progress.
Boards should know their ESG proxy and other rankings (e.g., ISS and State Street), so they can measure management’s progress on ESG initiatives and improve on remedial actions and disclosures.
To help, we’ve made a checklist for those looking to develop a clear strategy on how their company can best meet ESG goals — or for those who want more clarity on what to look for when considering companies for ESG portfolios.
Board responsibilities:
Appropriate committees: Consider having an ESG-specific committee, or build ESG expertise into a Compensation Committee for Human Capital Management, or a Nominating and Governance Committee for ESG/Sustainability.
Charters: If necessary, amend corporation charters to add this responsibility and appoint appropriate members to such committees.
Diversity, a business imperative: Create programs to ensure that you have a workforce that is representative, at every level, of the diversity of your customers, investors, communities and business partners. Add new board members when varied expertise is needed or desired.
Tracking costs and success: Review metrics relating to your business against ESG activities and what they cost to evaluate the success of these activities across all business units.
Retain ESG measuring firm: Retain a thirdparty firm like Sustainalytics or MSCI, so you have an outside barometer to measure your progress and lend credibility.
Assign management: Assign responsibility for your ESG program to one person: general counsel, head of investor relations, CFO, or chief ESG officer.
Compensation plans: Add ESG progress — e.g., diversity and inclusion, employee and customer satisfaction, and community responsibility — as an individual performance factor, along with company performance, in the annual short-term incentive plan for executive officers.
Green bonds: Consider whether issuing a green bond is right for your company. Such issuances have tripled in the last year, as companies use these as one way to access ESG capital and finance important sustainability investments.
ESG investor outreach: Define an outreach program to access the $25 billion of capital investing in ESG-friendly companies, expected to grow to $40 billion within a few years.
Policies and reports every company should have:
Metrics: Create a chart to track and measure ESG initiatives over time, so your stakeholders can see your progress. The metrics tracked might follow social, environmental and climate impacts, employee well-being and engagement, training, diversity inclusion, anti-harassment, sustainability, organizational development, and employee wellness.
Public policies and reports: Responsible committees should make sure the company has adopted and posted on its website all appropriate reports, e.g., human rights, corporate social responsibility (CSR) or sustainability, environmental, supplier code of conduct, diversity and inclusion, etc. In the 10-K, include a Human Capital Management (HCM) report that’s accurate and comprehensive.
Sustainable Development Goals (SDGs): Ensure the ESG program addresses the United Nations’ 17 SDGs, which many money managers and institutional investors are using to determine whether you meet their ESG investment qualifications.
Proxy disclosure to look for:
Board members: Bios should show ESG expertise where appropriate and diversity statistics that satisfy applicable law, e.g., California and NASDAQ. A skills matrix should also be included. More and more companies are using graphics to drive the expertise and skills message home—“a picture is worth a thousand words.”
Board nomination graphics: Companies are also starting to include director nomination and succession graphics to show how they look for and appoint individuals with expertise and diversity.
CSR report: A Corporation Social Responsibility/Sustainability Report should be included as well as the HCM report (which can be extracted from the website and the 10-K). These disclosures will help improve ISS and other institutional shareholder ESG rankings.
ESG rankings: Boards should know their ISS and other ESG rankings (e.g., State Street’s R-Factor, or Blackrock’s) to determine if improvement is necessary and take remedial actions. This might include adding or supplementing training and safety programs, benefits and wellness programs, diversity hiring and promotion programs, community outreach, evaluating energy efficiency, water usage, waste minimization, greenhouse gas emissions and climate risk, and impact on natural resources.
Regulators and disclosures:
Regulators eye impacts: Rostin Behnam, Acting Chair of the Commodity Futures Trading Commission, last September commissioned a first-of-its-kind report, “Managing Climate Risk in the U.S. Financial System.” He followed in March by announcing a Climate Risk Unit with a focus on derivatives. He said it will support “industry-led and market-driven processes in the climate — and the larger ESG — space critical to ensuring that new products and markets fairly facilitate hedging, price discovery, market transparency, and capital allocation.”
Standards evolving: S.E.C. Acting Chair Allison Herren Lee noted that “no single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that ESG (issues) pose to investors, our financial system and our economy.” In fact, the S.E.C. is working on revisions to the 2010 climate disclosure standards and global consistency on ESG disclosure requirements.
The biggest complex question for public companies is going to be how to balance the tension between profits, principles and ESG metrics. Lee suggested it will be an iterative process, taken in steps and requiring continuous improvement.
About the author: Mona Dajani is a partner and co-leader of global energy, infrastructure & mobility at Pillsbury Winthrop Shaw Pittman Law.
Holiday Inn® San Antonio North Hill Country
Great Hotels Guest Love!
Just the place for you! The Holiday Inn N Hill Country offers 111 spacious guest rooms with a contemporary appeal. 2,800 sq. ft. of flexible meeting space, onsite restaurant & bar, indoor pool and whirlpool.
Offering Complimentary Hotel Shuttle to and from the San Antonio International Airport and within a 5 mile radius.
19280 Redland Road | San Antonio, TX. 78259 P: 210 298 8820 F: 210 298 8830 ask for the SHALE rate
holidayinn.com/hillcountrytx
UNMATCHED TEXAS HUNTING RETREAT
After hunting several ranches throughout South Texas over the last 15 years, I have finally found one that has it all. Fantastic accommodations, food and overall comfort are second to none. The number of quality animals is simply unbelievable.
- Bobby Phillips
By: Joe Shakeenab, Retired Chief Warrant Officer Four (CW4), Special Forces
When I was a young Special Forces “Green Beret,” I often wondered what it took to be exceptional in an environment where everyone was deemed great. I’m certain I was not alone in my thinking, and many individuals in today’s workforce may ponder on this very subject in their quest for advancement.
Years have passed since my days in uniform, and I have been fortunate to have many opportunities to experience, engage with others and study the subject of being an exceptional leader. For me, understanding expectations and being able to measure performance was a part of the equation. Another concern I put forth today is the ability to perform at the next higher level, with associated responsibilities, in a mature and quantitative manner. I have learned that in many environments, being exceptional is not operating on a lateral scale; it is more of an inverted pyramid in terms of scope and frequency. One’s knowledge and application of such knowledge spans outward.
I will use a personal example to demonstrate the lessons of this article. As a member of the U.S. Army 5th Special Forces Group (Airborne) at Fort Campbell, Kentucky, I not only had to understand the individual and team standards, but I had to know the success criteria for the organizations in core areas of administrative and operational readiness. I had to think of my actions and lack of actions. I had to know when and where critical expertise was required and how to apply such skill sets. In short, I had to broaden my knowledge to that of an administrator, logistician, operator, security manager, budget analyst or so on.
In the process of performing more effectively, I often asked my superiors (evaluation rater and senior rater) what they saw as exceptional performance within a defined scope. I learned to shape the question for a more effective response. Once I knew their standards and philosophy, I performed accordingly. To the end, I was mindful of how I performed as an individual and as a team member.
I looked at regulations and policy guidance and sought to excel there. I made better use
of my time in the office (team room) as well as on the range or during deployments. I worked to be the solution to a problem or set of problems by putting in the long hours to be exceptional in my foreign language abilities. Furthermore, I knew I had to be in the best physical and mental conditions, so, in addition to gym workouts, I sought emotional balance through meditation.
Over the years of maturing as a professional and advancing in rank, I grew fond of grooming others to be exceptional. To me, being a teacher is a treasured mark of an exceptional leader. I wanted those to my left and right to be critical thinkers, visionaries, and transformational conduits. I wanted my program and the teams which support the program to be great for years after I was gone. I wanted others to be much more successful than me, but in a shorter time. To this day, I seek to be of greater value to individuals and organizations through guiding and empowering others. Mentorship, empowerment, and support of others are some noted virtues of exceptional leaders.
At the end of the day, when I sit and look out the window at the setting sun, I take comfort in knowing that today’s scholars and leaders in my areas of influence are prepared to be exceptional. Daily, I can see them embracing opportunities and greater responsibilities. With their advancement, I am confident that many of them will transition into being great mentors or advisors for others. Exceptional leaders build the next group of greatness within the ranks. About the author: Joe Shakeenab grew up in the historic Mound Bayou, MS. Upon graduating from high school in 1982, he joined the U.S. Army at the age of 17. This decision became a colorful career in Special Operations where he served as an Army Ranger with the 2nd Battalion, 75th Ranger Regiment and later as a Green Beret with the 5th Special Forces Group (Airborne). Joe served in combat during the first Gulf War (1990), Somalia (1993), and Afghanistan (2001 - 2002), all with the 5th Special Forces Group.
Joe retired from the U.S. Army in 2010 as a Chief Warrant Officer Four (CW4). Joe’s professional career is complemented by immeasurable experience in planning, directing, and advising in support of military and civilian organizations, at the international, national, and community levels.
In addition to supporting various charitable endeavors in Clarksville, TN Joe enjoys hiking, reading on the subject of personal development, and writing about influences and impacts. Joe is a published author and his works can be found at www.shakeenab.com.
