United States: Tips For Dispute Avoidance In The Current Oil Price Environment

Keywords: energy, oil, oil prices, dispute avoidance,

Oil prices, which held below $50/bbl in August 2015, are projected to remain below $60/bbl through 2016.¹ As a result, the conventional belief is that oil and gas disputes will rise in the latter part of 2015 and into 2016, triggered in some measure by the banks' next round of reserve-based redeterminations for oil and gas companies. Whether it is for this reason or some other, financial strain in the industry is likely to spin off disputes between producers and service companies and/or among working interest partners. Infrastructure and construction disputes also will be in the mix.

This article outline three steps that could maximize opportunities for dispute avoidance. If a dispute is not avoided, a party taking these steps should also be in a better position to manage and, hopefully, prevail in an eventual dispute.

Assess Your Contracts

A timely review of contract terms familiarizes the contract management team with the company's rights and allows them to spot contract risks early, so that steps can be taken to avoid or mitigate problems. Proactive contract reviews are more structured and productive than a reactive contract analysis in response to a problem that has already arisen or a claim that has already been filed.

Timely scenario analysis can be a useful complement to contract analysis. The breadth and depth of the scenario analysis can be varied in accordance with the risks and stakes. Outside counsel and/or consultants may be useful contributors, of course, because their experience may shed light on how similar scenarios have played out in similar circumstances. Even if scenario analysis is not appropriate for the situation, a simple flow chart of actions can assist the contract management team in navigating a difficult situation or difficult counterparty.

Actively Manage Your Contracts

It is axiomatic that a company should adhere to contracts. More is intended here—the suggestion is careful dotting of "i"s and crossing of "t"s. A counterparty at risk likely will be on the look out for any noncompliance or breach as a reason to escape a contract. Conversely, if you are the party needing relief, but are not looking to get out entirely, you do not want to provoke a notice of default or termination; this requires respect for the details of contract provisions. Therefore, careful attention to detail and strict contract compliance are recommended.

For example, a joint operating agreement may contain somewhat detailed requirements for an Authorization for Expenditure (AFE) or for awarding contracts through competitive bidding. Likewise, contracts routinely contain specific notice procedures for various actions, such as a declaration of force majeure, and sometimes also have specific deadlines for taking actions, such as objecting to an AFE or submitting a change order request. Accounting and procurement requirements can be traps for the unwary. Taking details seriously, and not just treating them as technicalities, can help keep the contract on the rails. Moreover, compliance with applicable time-bars and notice requirements ensures that the right to make a claim is not lost, even if a settlement might be expected or achieved.

Active contract administration also entails communication. Queries from a counterparty, or even notices of default, cannot be dealt with by silence. Silence generally worsens a situation. Ignoring it will not make it go away.

Avoid Aggravating the Situation

If a default or breach has occurred or is imminent, a dispute may still be avoided if the situation is analyzed and managed properly. To start with, if not already done in a proactive mode, a prompt and properly informed analysis of the problem allows you to assess available options, including mitigation strategies. This reduces the risk of an admission against interest or other compromising statement being made.

Pay close attention to the timing and tone correspondence. Respond in a reasonable time; do not ignore letters or emails. Aggressively toned letters ("Nasty Grams") likely will aggravate what may already be a tenuous situation. Moreover, the drafter should assume that the letter will be exhibited in proceedings if the situation is not successfully resolved. Correspondence that is temperate and judicious not only reduces the risk of escalation, but will also put you into the strongest position possible before your court or arbitral tribunal.

In addition, keep careful records of all communications, including notes of telephone conversations or meetings for which minutes are not prepared. Gather all relevant documents. Avoid creating prejudicial documents that might be produced in discovery later. Difficult issues should be taken up in phone calls or meetings rather than internal memoranda or emails where possible.

Ensure that reasonable steps to avoid or reduce loss are properly considered and taken. Mitigation is usually good for the company and is a prerequisite to the recover of damages in most jurisdictions. That could even mean entering a new contract with the same counter-party.

Finally, keep the commercial settlement option open. Most disputes need not be treated as "line-in-the-sand" matters or raise precedent-setting issues, and these can be resolved commercially. Settlement saves money, effort and distraction of management, and preserves commercial relationships for the future.

Footnote

[1] EIA Short-Term Energy Outlook, August 11, 2015.

Originally published 9 September 2015

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