The Increase in Adversarial Proceedings Between Energy Companies


When it comes to how energy companies treat one another, a change is in the wind. Energy companies have become more willing than ever to instigate adversarial proceedings in order to recoup damages, even against fellow industry members. The trend is partially facilitated by an increasing reliance on alternative dispute resolution (ADR), including, for example, arbitration procedures incorporating expedited schedules. The numerous mergers and acquisitions among industry members have also contributed to this change in industry culture.

Background

Historically, energy companies have been the prime targets of litigation initiated by both private and governmental entities. Increasingly, however, energy companies are pursuing legal action against one another to protect a perceived right and often to recover monetary damages. Specifically, proceedings are increasingly initiated to address disputes over purchase and sale agreements of oil and gas producing properties or other assets, well-service agreements, rig contract disputes, joint operating agreements, production sharing agreements, construction contracts, plant processing agreements, and pipeline transportation agreements, just to name a few.

Two reasons for this trend stand out, one cultural and the other procedural. Culturally, the energy industry has undergone tremendous change at least in part a result of mergers and acquisitions, and related spin-offs. This corporate evolution within the industry has been accompanied by changing business strategies and a much more migratory management, including frequent changes within in-house legal departments and business unit upper management. Within this increasingly dynamic landscape, industry members are less politically inhibited from pursuing business disputes beyond informal negotiation – all the way to intra-industry adversarial proceedings.

Procedural developments have also facilitated the rise in legal confrontations by eliminating or at least minimizing perceived inefficiencies associated with traditional litigation. This reluctance to engage in traditional litigation is understandable, based in part on the protracted nature of trials and appeals, expense, distraction from business objectives, uncertainty of the outcome (especially when before a jury), risk of losing confidentiality of proprietary information, damage to otherwise valuable business relationships, and potential for negative public relations. The increasing availability and acceptance of various forms of ADR (referred to by some as "appropriate dispute resolution" or "complementary dispute resolution") has provided business unit managers and in-house counsel with an attractive and sometimes fitting procedure to pursue disputes in a procedure that may even be binding, yet avoids many of the perceived dangers of a trial.

ADR Options

There are many different forms of ADR, including, but not limited to, fact-finding non-binding mediation (largely used in the labor-management context), conciliation, mini-trials and summary jury trials, arbitration, and other mixed processes that seek to couple various approaches, such as a mediation or arbitration.

Mediation is perhaps the most commonly used approach, with a large majority of pending court cases and many other pre-suit disputes undergoing mediation, both by mutual consent and court order. There is a wealth of experienced and qualified mediators in Houston, ranging from retired trial judges and appellate justices to practitioners with many years of experience. Quite often, adversaries are able to mutually select a mediator who has specific expertise in the area of controversy and who has the respect of both parties. The scheduling and length of the mediation is flexible and generally left to the parties' discretion in concert with the mediator. Mediation, however, is limited in that it is non-binding. Hence, while it may assist parties in better defining a dispute, it cannot force a resolution.

Accordingly, an increasingly adopted approach is binding arbitration. Depending on the rules chosen to control the arbitration (e.g., American Arbitration Association, CPR Institute, or ICC Rules of Arbitration), the parties can generally expect a more expedited procedure, arbitrators with expertise and experience in the specific area of controversy (certainly greater than a potential jury), greater control and confidentiality over the exchange of information, and more reliable results. The parties can also limit the scope of the issues to be decided as well as the arbitrator's award. For example, the parties can agree in advance that the arbitrator does not have authority to award punitive or consequential damages or otherwise go beyond a defined scope of consideration. Of course, by limiting the dispute, the parties not only reduce risk and uncertainty, but also increase the prospects of achieving resolution without irreparably harming business relationships.

The increasing trend toward arbitration is also partially explained by the profusion of arbitration clauses within numerous form and non-form agreements used by energy companies. While these clauses come in several variations, they generally require any dispute relating to the contract to be resolved through binding arbitration. Additionally, for the reasons discussed above, parties are often willing to agree to submit an existing dispute to arbitration even in the absence of a contractual requirement to do so.

Because arbitration enables the business unit to pursue a dispute with a reasonable prospect of limiting the dispute's duration and expense, and also to increase the reliability of the outcome (or at least to better define the range of potential outcomes), perceived obstacles to adversarial proceedings have been eased. Accordingly, by eliminating, or at least lessening, certain thresholds which have traditionally inhibited energy companies from initiating adversary proceedings against one another, arbitration has provided managers with a means of pursuing disputes that may have previously been left unresolved or which might have been settled on less satisfying terms. In other words, this modified procedure and forum is often better suited to business managers' strategic planning, budgeting and risk tolerance.

*article courtesy of Houston Business Journal.