06.08.2022

This article is from the McGinnis Lochridge Oil & Gas newsletter, Producer’s Edge – Vol. 4, Issue 1. Read the full newsletter here

Mediation has become an indispensable tool in Texas, allowing many lawsuits to be processed faster, more accurately and more economically. Over the last 25- years, the costs of litigation and the time to reach trial have increased exponentially. Meanwhile, in-house counsel increasingly are faced with smaller budgets, fewer inhouse resources, and an expanding role in running the business and achieving corporate objectives.

In most cases, mediation can be used to rein in costs and speed up resolution of disputes—whether title issues; deal disputes; operator/nonoperator disputes; royalty disputes; surface disputes; tubing failures or any number of downhole operation failures.

As oil/gas practitioners are aware, mediation is merely a third-party assisted settlement conference, in which an independent neutral helps the parties communicate, explore settlement options (including business solutions), and craft a binding settlement agreement that brings finality to the dispute.

The idea for this article arose after the authors were comparing notes about what worked and didn’t work at recent oil/gas mediations. Paul D. Clote built his reputation as a trial lawyer over four decades. In recent years, he has transitioned his practice to serving exclusively as a mediator and arbitrator, often in oil/gas disputes. Austin Brister is a highly experienced oil and gas litigator, focusing on operator/non-operator disputes, lease disputes, and “deals gone wrong.” After exchanging observations, we thought it might be helpful to highlight recommendations to when mediating oil/gas cases. We hope you find this article insightful, and welcome any feedback or comments by email or phone call.

 TIP 1: IS YOUR CASE RIPE FOR MEDIATION?

 It is important to know whether your case is ripe for mediation. Yes, one of the hallmark benefits of mediation is avoiding potentially unnecessary litigation expenses. However, some disputes are not ripe for mediation until critical threshold discovery has been completed; otherwise, mediation may be an exercise in futility and simply embolden the opposing party.

Prior to mediation, all parties should have exchanged sufficient information to capably analyze the claims and defenses, alleged damages and the risks inherent to trial. If both parties cannot accurately assess liability, causation and damages prior to mediation, do not expect meaningful settlement offers and counteroffers to be made.

Many oil and gas cases are quite complex, factually and legally. Parties often have divergent, polarized views of the material facts and legal analysis. If one party does not understand or appreciate the counter-party’s position, the potential for impasse at mediation is much greater.

This is not to say that a case is only ripe for mediation once both sides have exhausted all discovery that otherwise would be completed prior to trial. Instead, evaluate whether sufficient discovery has been undertaken to allow both sides to meaningfully evaluate the risks, anticipated costs, and value of a business solution.

Whether a case is ripe for mediation may depend, to varying degrees, on whether the parties have consulted with expert witnesses, or undertaken expert discovery. Oil/gas disputes often involve expert witnesses, such as a metallurgist to evaluate casing failures; an engineer to evaluate prudent operator or negligence claims; well interference claims; drainage, operational issues or delays; accountants to evaluate damage models; experts regarding custom and usage; or surveyors regarding boundary lines. In complex cases, the parties may need to prepare for mediation by consulting with their own expert witnesses. In some cases, the parties may consider bringing their experts to the mediation, or having the experts on standby for consultation during the mediation.

Whether the case is ready for mediation also may depend on whether insurance coverage exists for the alleged loss; whether the carrier has been placed on notice and performed its requisite investigation; whether any coverage issues exist; and whether the insurance carrier has developed sufficient information to set necessary reserves.

For example, in litigation over reservoir damages, pipe failure, or a blowout, the parties should ensure that the insurance carrier has all necessary information prior to mediation. The insurance carrier must have sufficient information to assess liability risks, potential damages, and a realistic case value. If the insurance company has not set appropriate reserves sufficiently in advance of the mediation, the potential for success at mediation is greatly diminished. Adjusters never want to make decisions on the fly or enter into settlements that are not consistent with their reserves.

If you are representing an insured operator, a driller or other service company, and if the carrier is disputing coverage for some or all of the alleged losses, you may want to engage specialized coverage counsel for your insured.

TIP 2: CONSIDER EARLY MEDIATION (BUT ONLY FOR THE RIGHT CASE).

As a counter-point to the first tip, consider whether an early mediation might prove beneficial. Early mediations do entail greater risk because, generally, there is less information available to assess the claims and defenses. Of course, prioritizing the necessary discovery is a challenge for even the most experienced litigation counsel. Cases are always full of surprises.

In the right case, however, there can be significant value to an early mediation (aside from obtaining quick, inexpensive discovery). Early mediations can be successful, but only if the oil/gas practitioner carefully analyzes the legal claims and undertakes the requisite investigation and documentation.

Many disputes can be ready for mediation before a lawsuit is ever filed. For instance, for the right case, a pre-lawsuit mediation may be appropriate after the mere exchange of demand letters, basic documentation and perhaps a draft complaint. A key factor is whether sufficient information has been exchanged to allow the parties to engage in a productive mediation.

In recent years, more and more contracts have included mandatory mediation provisions. The inclusion of a mediation provision can prove useful in preventing a race to the courthouse, and encouraging parties to first attempt to find good faith business solutions.

Early Dispute Resolution, sometimes referred to as EDR (or in the vernacular of the ABA, “Planned Early Dispute Resolution”), may offer benefits as well. EDR is a new approach to mediation, with parties and counsel jointly committing to an accelerated exchange of the most important documents and witness information; followed by an exchange of decision tree analytics that guide settlement offers. In the coming years, EDR may offer some litigants even greater savings in fees, costs and expenses, while promoting accurate case evaluations.

TIP 3: ADEQUATELY PREPARE IN ADVANCE OF THE MEDIATION.

Preparing the case and your client for mediation are often overlooked. In advance of the mediation, it is helpful to generate a written legal analysis of liability, causation and damages; and to meet with your client to discuss the issues.

Key to success at mediation are accurately evaluating the claims and defenses; analyzing the strengths and weaknesses of the issues, assessing the probabilities of specific liability and damage findings; understanding clearly the client’s goals and objectives; anticipating how the opposing party is likely to negotiate at mediation; developing a reasonable settlement range for the specific case; formulating a plan on how to negotiate toward that targeted settlement range; and analyzing the best alternative to a negotiated agreement. Also important are anticipating the additional steps to complete discovery prior to trial, and the budget for trial of the case.

These suggestions may seem obvious, but often, some of these vital preparations may be overlooked. Successful lawyers arrive at mediation having previously spent meaningful time with their clients discussing the strengths and weaknesses of the case, and assessing the projected cost and expense of proceeding to trial.

Mediators can, and should, assist the parties by prompting these conversations and asking the right questions so clients can appreciate case value. But there is only so much a mediator can do, particularly given the short amount of time available. If a client arrives at mediation with significantly inflated expectations, or significantly underappreciating the risk, it can be difficult to re-set those expectations in the short time available. Good lawyers precondition their clients to understand the economic realities of the case, and the risks and expenses going forward.

After submitting written materials to the mediator, but prior to mediation, educate the mediator by using Zoom or telephone calls to discuss details of the litigation, brainstorm ideas for settlement and identify potential obstacles to settlement.

TIP 4: USE A MEDIATOR WELL- SUITED FOR THE PARTICULAR CASE.

Mediators are not “one size fits all.” Mediators widely vary in terms of temperament, personality, experience, style or approach to the settlement process. Key to a successful mediation is selecting the right mediator—one that is wellsuited to guide the parties to settlement.

It is very helpful if the mediator has experience in the type of case, industry area, or area of law involved. That expertise can be critical to understanding the case, evaluating the claims, and assisting the parties in getting to closure.

The personalities and emotional characteristics of the parties also may affect the mediator selection. If one or more parties are hard-headed, intransigent and refuse to acknowledge reality, consider using a mediator that has a blunt, extremely direct, evaluative approach. Such a “pile driver” mediator may help one or more parties appreciate the weaknesses in claims or defenses. That type of mediator, however, must be careful not to alienate the parties.

Another mediator style might be described as “listener/communicator.” While all mediators are trained to listen actively, this style of mediator focuses on understanding how emotional or inter-personal conflicts may - sometimes unconsciously - drive a case.

Austin recalled a recent mediation where he represented an oilfield service company. The president felt his contributions were significantly under-appreciated and he was offended by the operator’s audit and subsequent refusal to pay invoices. The chosen mediator was an extremely careful listener with a disarming demeanor. The mediator’s approach helped the client know that his positions and arguments were understood and valued. That, in turn, helped guide the mediation toward a business resolution.

 TIP 5: DEVELOP A STRATEGIC APPROACH BUT DON’T BE AFRAID TO MODIFY YOUR STRATEGY.

Every case is different and every mediation is different. Parties should consider how they wish to negotiate at mediation, and develop a strategic approach to getting to settlement.

Since most mediations last long, full days, be mindful not to play all the cards at one time. Pace your presentation of evidence, legal arguments and issues to maximize the benefit of the arguments.

At some point in the day, the parties’ negotiations will likely be reduced to trading economic proposals. Until that happens, use the case details to help move the economic trades.

TIP 6: KEEP AN OPEN MIND, REMAIN FLEXIBLE AND JUST KEEP MOVING.

Parties achieve reasonable and appropriate settlements when they and their attorneys remain open-minded and flexible to considering a variety of settlement options.

Often, there may be a business solution that makes the most sense. Gas contract disputes, non-compete cases, trade secret disputes, patent infringement claims all have the potential for business solutions. At mediation, good lawyers will persistently focus on their client’s objectives. The recovery of cash compensation may not be the only or best way to achieve a settlement. Creative lawyers really do aid their clients by considering multiple settlement options.

Your initial impression of the appropriate settlement structure may not ultimately be the most conducive to reaching a resolution. Stay open-minded, and think outside the box, because a different structure may ultimately secure your client a favorable outcome.

Regardless of how stressful, how anxious or temperamental a party or counsel may be, remember that settlements often come at unexpected turns.

The mediation itself is a process. No matter where parties start their bargaining, and regardless of the negotiation tactics employed, persistence at mediation pays off. If settlement discussions appear to be falling apart, encourage the mediator to present multiple options to both parties. Consider using brackets, high-low proposals, “if/then” and “what would it take” questions, mediator proposals and similar procedures.

TIP 7: REMEMBER PARTIES ARE THERE FOR A PRUDENT BUSINESS DECISION, NOT TO WIN A WAR.

Most lawyers have been in a mediation where one or more parties become angry, frustrated or act out. Just deal with it. Sometimes venting is necessary for a party. Look to the mediator to retain control of the process and keep the settlement train on the tracks.

Hopefully, parties or lawyers will not become fixated on being “right” or the other side being “wrong.” Instead, their focus should be on what would constitute an informed, reasonable business decision. As Mick Jagger says, “You can’t always get what you want.” In most cases, if the settlement terms are barely palatable to both parties, the settlement probably is appropriate.

Engaging in principled negotiations; taking the high ground; emphasizing your client’s reasonable and realistic positions all pay dividends. Piein-the-sky demands or unrealistic cellar offers invite similarly unreasonable offers. If the parties are realistic about the facts of the case, the applicable law, the case value; if they accurately assess their litigation risks and expenses, the case will settle.

Patience pays enormous benefits. It is not uncommon for mediation to succeed because it provided a forum for one party to “be heard.” Airing grievances takes time. Always look for ways to advance, constructively, the settlement discussions. Confrontational brinksmanship does not work. Patient advocacy does.

All parties should attend mediation with the focus on settlement terms based on the merits of the case or defense, and make informed business decisions. Bullying, threats, intimidation, and extreme hyperbole serve no useful purpose in mediation.

While the laser focus of all parties should be on realistic case value, parties should remain mindful of the collateral consequences to litigation. Tangible and intangible litigation costs and consequences do exist. For instance, reputational damage from litigation is possible. Rather than just being a legal gladiator, lawyers serve their clients best when they counsel them with wisdom, experience and insight.

TIP 8: GET THE SETTLEMENT IN WRITING, WITH ALL MATERIAL TERMS.

 Once an agreement in principle is reached at mediation, take all necessary steps to ensure that the settlement terms are reduced to a binding and enforceable agreement. If parties leave a mediation without a written, enforceable agreement, one or both parties may later develop “buyer’s remorse.” Without a binding agreement, one party or another may conclude overnight or upon several days’ reflection, that they “could have/should have/would have” done something different at mediation.

That underscores the importance of: (a) getting all the right preparation for the mediation accomplished on the front end; and (b) getting the settlement agreement in writing, signed by the parties before they leave the mediation.

Oil and gas cases often involve complex issues. Lawyers should anticipate detailed settlement terms in advance and consider preparing a draft mediation settlement agreement before attending the mediation. Clients know their business the best of anyone, so obtaining all necessary comments and feedback from the client regarding potential settlement options is vital. Even if a more formal, detailed settlement agreement is necessary to implement the settlement terms, before leaving mediation, the parties should get all material terms of the agreement in writing and signed.

The mediation settlement agreement must be clear and have no ambiguities or material uncertainties. Otherwise, more litigation is likely.

Attorneys also should pay necessary attention to important non-monetary settlement terms. For example, in an oil/gas case, a material, non-monetary term may include repair or remediation; processing of electronic data; amendments to operating agreements or AMIs; agreements regarding future operations or accounting treatment; title curative instruments; tax provisions; releases or the discharge of outstanding liens. As with any case, a settlement may include non-disclosure and/or nondisparagement terms, or noncompete and/or nonsolicitation terms. Parties are well-advised to pay special attention to any settlement terms that might offer the opportunity for future disputes between the parties.

Occasionally, the injection of non-monetary terms may disrupt the settlement negotiations at mediation. Timing is everything. Depending on the case, it may make sense to ask for nonmonetary terms only after the parties are very close on the financial terms.

On the other hand, asking for certain non-monetary terms might significantly alter the monetary value of the amounts that parties could pay or accept. In those cases, it is advisable to raise those terms prior to reaching agreement on financial terms.

CONCLUSION

Every dispute is different, and every mediation is different. Not every case can or should settle at mediation. However, at the end of the day, most oil/gas clients value business objectives over a “win-at-anycost” approach. By adopting a business-focused approach to mediation, and diligently preparing for the mediation, parties maximize the potential for a settlement agreement that avoids unnecessary cost, time, and the vagaries of a trial.

ABOUT THE AUTHORS

Paul D. Clote serves as a full-time mediator, arbitrator and special master in complex commercial cases. For more than four decades, he was a litigation attorney handling trials and appeals.

Austin Brister is a partner in our Oil and Gas group. Before lawsuits are filed, Austin helps oil and gas companies analyze complicated issues, and strives to develop creative and practical business solutions. But, when necessary, Austin works hard to implement aggressive, goal-focused strategies in the courthouse. Austin frequently assists clients in resolving problems involving title disputes, injunctive relief, joint operating agreements, accounting issues, royalty disputes, lease termination disputes, surface use and trespass issues, purchase and sale issues, lease saving operations, and a host of other oil and gas issues..

 

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