Mediation in Oil and Gas Law Disputes

Mediation in Oil and Gas Law Disputes

 

By Lisa C. McManus, Esq.[1]  |

Discourage litigation. Persuade your neighbors to compromise wherever you can. Point out to them how the nominal winner is often a real loser – in fees, expenses, and waste of time. As a peacemaker, the lawyer has a superior opportunity of being a good man. There will still be business enough.

Abraham Lincoln  

        I.            INTRODUCTION TO ADR

In the early 1980s, the Rand Corporation conducted a study that revealed that the average combined cost of a jury trial to taxpayers and the parties, in all federal courts and a major state jurisdiction surveyed, was approximately $16,000 per case, but the amount of recovery in roughly 75 percent of civil trials in one typical major urban jurisdiction was less than $8000. Warren E. Burger, Reflections on the Adversary System, 27 Val. U. L. Rev. 309 (1993). Available at: http://scholar.valpo.edu/vulr/vol27/iss2/1. The study underscores just one root cause of the wide-spread dissatisfaction with the American court system: the poor return on investment in the pursuit of dispute resolution.  

The expense, complexity, and delay inherent in the American system of justice has long been the subject of discontent. In 1906, Roscoe Pound addressed the Annual Convention of the American Bar Association in St. Paul, Minnesota on the topic,[2] but despite his well-reasoned lecture, no real attempt for reform was initiated until 1976, when the American Bar Association sponsored the Pound Conference. Focusing on the central theme, "The Causes of Popular Dissatisfaction with the Administration of Justice," the Pound Conference is credited as the impetus of the modern era of alternative dispute resolution ("ADR") in the courts. Since the conference, court-annexed ADR programs have been established throughout the United States, and legislation has been enacted to provide alternate routes to litigation. ADR may include mediation, arbitration, mini-trial, and summary jury trial. For many reasons, mediation may be the preferred method of resolving oil and gas law disputes. 

      II.            BENEFITS OF MEDIATION

In general, mediation has many advantages over other methods of ADR and litigation: cost effectiveness, expediency, confidentiality, and flexibility. A drawback to the formal adjudicative process is the winner-takes-all approach whereby no alternate method of providing both parties with an acceptable resolution are available. Mediation promotes investigation of alternative routes to resolving disputes, both economic and non-economic, that may be overlooked by the formal proceedings.

On the other hand, to be successful, mediation requires that the parties be capable of compromise. Rarely may all interests be fully accommodated, and in most cases, disputes require concession. Litigation is an easy solution for some disputants because the requirement of making a decision is taken from litigants: the adjudicator determines the outcome. In mediation, the participants must determine the prudence of a proposed compromise. Whether a compromise is a reasonable and desirable accommodation or an unfair and injurious capitulation may be difficult to discern, and responsibility ultimately lies with the decision maker, who must often report to others, such as a board of directors or shareholders, for the decisions made.

Nonetheless, mediation gives the litigants the ability to fashion a compromise that may not give each party everything sought, but does avoid the possibility of complete loss of everything that the party wants. Moreover, the cost savings in terms of counsel fees, lost productivity, and unknown liability on a balance sheet is considerable.

Key to the success of mediation is the control given to the parties and the mediator over the unfolding of the proceedings. No mandatory procedural routine exists. Generally, the proceedings begin before the parties formally meet when the parties provide the mediator with background information on the matter.

Mediators usually commence the mediation by explaining how the mediation will be conducted and by asking the parties to abide by a rudimentary set of procedures designed to facilitate amicable negotiations. The introduction of the process by the mediator is intended to create an atmosphere conducive to compromise, wherein the mediator will exhort the parties to set aside the emotional component of their dispute. Thereafter, each party has an opportunity to present his “side” of the story.

Although ideally the paradigm of mediation as a collaborative process should focus on the direct communication between the participants, compromises such as the involvement of lawyers as primary spokespersons and increased use of private caucuses in lieu of joint sessions is inevitable in some cases. In many cases, the road to resolution does not truly commence until the parties move to separate rooms and the mediator engages in shuttle diplomacy. Either party or the mediator may suggest joint meetings and private caucuses at any time during the mediation, as the parties and their counsel feel would be most productive. The parties may rely on the mediator for all negotiation, or they may engage in direct negotiation with little input from the negotiator.

The lack of evidentiary rules, other than confidentiality[3], promotes a discussion of all matters deemed important by the parties, regardless of relevance. Whereas traditional adjudicative models filter evidence to permit only that which has a direct impact on the subject matter of the litigation, mediation encourages the parties to evaluate what to include in their presentations and discussion. As a result, the parties' needs, interests, concerns, and motives underlying their positions are often introduced to the proceedings.   

    III.            FEDERAL COURT MEDIATION

In 1978, the first federal court-annexed mandatory arbitration programs were established in three districts on a trial basis.[4]  In 1983, Rule 16 of the Federal Rules of Civil Procedure was amended to encourage courts to consider the "possibility of settlement" or "the use of extrajudicial procedures to resolve the dispute" at pre-trial conferences. See 1983 Amendments to Fed. R. Civ. P. § 16(c)(7) and Advisory Committee Notes.  Title IX of the 1988 Judicial Improvements and Access to Justice Act, Pub. L. No. 100-702, 102 Stat. 4642 (1988), later authorized court-annexed arbitration programs in additional pilot districts.  The Civil Justice Reform Act of 1990, Pub. L. No. 101-650, 104 Stat. 5089 (1990) (codified at 28 U.S.C. §§ 471-482), required every federal district court to at least consider court-sponsored ADR in its required Civil Justice Reform Act Plan.

In 1998, Congress enacted the Alternative Dispute Resolution Act, which requires every federal district court to authorize, by local rule, "the use of alternative dispute resolution processes in all civil actions," and to designate a judge or other employee to be knowledgeable in ADR practices. 28 U.S.C. § 651. The Act authorizes federal courts to compel participation in mediation or early neutral evaluation. By local rule, each district court must require litigants in civil cases to consider using ADR at an appropriate stage in the litigation, although some categories of cases or specific cases may be exempted as not appropriate for ADR. 28 U.S.C. § 652. Congress required that neutrals used in ADR processes be adequately trained, and specifically suggested training of magistrate judges, or use of professional neutrals from the private sector. 28 U.S.C. § 653.

                In most programs, within 30 days of the filing of defendants’ Answer, the Court will enter an order setting forth the date and time of an initial scheduling conference and the dates by which the parties shall confer and file the Rule 26(f) Report (so named as the provisions are set forth in Fed. R. Civ. P. 26(f)). Generally, the Rule 26(f) Report is due at least 21 days before the scheduling conference. The Rule 26(f) Report is a joint report that identifies the specific ADR process the parties have discussed and selected, as well as the anticipated timeframe for completion of the ADR process. When litigants have not stipulated to an ADR process before the Scheduling Conference, the Court will discuss the ADR options with counsel at the conference. If the parties cannot agree on a process before the end of the Scheduling Conference, the Court will make the selection for the parties.

The parties are expected to participate in ADR in good faith.  Ideally, the Court wants ADR to take place before discovery, but the judiciary recognizes that situations exist where some discovery must occur before meaningful settlement discussions can take place.    

    IV.            THE BENEFITS AND CHALLENGES OF MEDIATION OF OIL AND GAS LAW DISPUTES

Mediation is ideally suited for the resolution of many oil and gas disputes for a multitude of reasons. In many cases, the dispute will be between parties who have a continuing relationship. Because mediation is less adversarial than litigation or arbitration, it offers the parties the opportunity to forge a settlement of their differences on a mutually acceptable basis. While neither party may be completely happy with the resolution, a mediated agreement may serve to avoid a situation in which one party is so bitter from the outcome of the adjudicative process that the parties’ relationship is forever tarnished. Consider operators who have long-standing relationships with landowners with large holdings: maintaining an amicable relationship in the face of a dispute over one tract is key to preserving business benefits on all holdings. Mediation removes fault from the equation and allows the parties to simply agree to a solution to their dispute that both can live with.

Mediation allows the parties to craft creative solutions to their problems that the adjudicative process does not afford. For example, if the parties’ dispute concerns deep rights in one locale, the parties may agree to a swap of other acreage that one party may not find valuable but the other does.  Similarly, if a dispute arises as to whether a lease is being held by production, the lessor and lessee may compromise by executing a new lease with terms that are reasonable to both parties.  In a dispute over whether exercise of a pooling clause was in good faith, the parties may agree to a release of some acreage and retention of other acreage.

In some cases, both parties to an oil and gas law dispute are used to “calling the shots.” The degree of direct involvement by the parties allows such individuals to direct the process and outcome of the matter, rather than their abdicating all control to counsel and an adjudicator. In other cases, great inequality may exist between the parties’ financial wherewithal and perceived influence; mediation can even the playing field, allowing the parties to engage in discussions to fully explain their positions to one another and search for common ground.  

Privacy and confidentiality are essential to the success of mediation and make it a clear choice for disputes that the parties would rather not have publicly followed. If the law is unsettled and an adverse ruling could severely impact either or both parties, mediation provides a venue to pursue a moderated negotiation without the potential for creating precedent. The opportunity also exists for a major producer to capitulate on an issue in an isolated case without fearing the repercussions in the form of a multitude of additional lessor actions. 

Perhaps one of the most valuable opportunities afforded by the mediation process is the chance to level-set the expectations of both parties. Settlement may be impossible because of an intransigence in an attorney or party as to the value of the case, view of the facts, or interpretation of the law. While a mediator may not bind the parties, a good mediator will certainly offer thoughts as to the strength of a position during private caucus. This may provide insights to both counsel and the parties as to the likelihood of success if litigation is pursued and thus may encourage settlement.  

Reduction of cost in both terms of legal fees paid and energy invested in prosecuting or defending a lawsuit is also a driving factor. Although there is no guarantee of success in mediation, should the parties be able to resolve their dispute, countless hours of discovery and trial preparation can be avoided. Moreover, the principals involved in the suit will not lose hours to deposition preparation and attendance, other discovery preparation and response, meetings with counsel to discuss strategy, or trial attendance.

One issue of concern is finding the right mediator for oil and gas disputes:

In energy and natural resources disputes, knowledge of the industry can be essential to the mediator's credibility and hence success. Unfortunately, the number of mediators that possess all of these characteristics is small indeed.

John P. Bowman, DISPUTE RESOLUTION PLANNING AND PITFALLS FOR ENERGY AND NATURAL RESOURCES DISPUTES, 50 Rocky Mt. Min. L. Inst. 8-1 2004. Locating an attorney who is knowledgeable with regard to the oil and gas industry but does not have a conflict with any of the parties can be a challenge. It may be necessary in some cases to settle on a mediator who has a generalized knowledge of the law underlying the dispute and to educate him to the extent necessary with regard to the esoteric points of oil and gas law applicable in the case. As the mediator cannot bind the parties, facilitated negotiation by a skilled litigator may be sufficient to engage the parties with each other to resolve the matter. 

      V.            CONCLUSION

Mediation can be highly effective in resolving oil and gas law disputes where the parties are capable of compromise and desire to keep a high level of control and confidentiality with regard to the proceedings. Resort to mediation can facilitate an expeditious resolution of a dispute, thereby resulting in expediency and cost-savings. Regardless of whether ADR is required by the jurisdiction in which the dispute is being litigated, consideration to this non-adjudicative dispute resolution process should be considered in oil and gas law disputes where it is believed that a negotiated settlement might be reached. 

RECOMMENDED READING

Daniel E. Cummins, How to Improve at ADR; Tips from Mediators and Arbitrators on Preparation and Presentation, Pa. L. Wkly., Apr. 12, 2011, at 9.

Abraham J. Gafni, Sealing the Deal; How to Ensure That a Mediated 'Final Settlement' Is Final in Fact, Pa. L. Wkly., Sept. 7, 2009, at 5.

Abraham J. Gafni, The Value of the Opening Statement in Mediation; Openings help the mediator and the parties see a case in a rational light, Pa. L. Wkly., June 1, 2009, at 12. 

Peter F. Vaira, Complex Resolutions; Mediation in Complex Cases Requires an Experienced Mediator and Skilled Trial Lawyers, Pa. L. Wkly., Jan. 26, 2009, at 13.

Daniel E. Cummins, A Still-Rising Trend; It is Essential to Master the Fine Points of Mediation and Arbitration, Pa. L. Wkly., Jan.21, 2008, at 6.

Patricia L. Rizzo, Beating Swords into Plowshares: Why and How Successful Medical Malpractice Mediation Demands the Transformation of Litigators, 76 PA Bar Assn. Q. 130 (2005)

Grace E. D'Alo, Reflections of Pennsylvania's ADR Community: Paradise, Pragmatism, and Progress, 108 Penn. St. L. Rev. 309 (2003)

Joseph Shade, The Oil & Gas Lease and ADR: A Marriage Made in Heaven Waiting to Happen, 30 Tulsa L.J. 599 (Summer, 1995)

Office of General Counsel Dispute Resolution, http://www.portal.state.pa.us/portal/server.pt/community/dispute_resolution/4415

Roscoe Pound, The Causes of Popular Dissatisfaction with the Administration of Justice, 29 A.B.A. Rep., pt. I, 395-417, 1906, available at http://law.unl.edu/splash/Roscoe_Pound-Causes_of_Popular.pdf

Symposium: Transatlantic Perspectives on Alternative Dispute Resolution: Mandatory Court-Annexed Alternative Dispute Resolution in the United States Federal Courts: Panacea or Pandemic? 81 St. John's L. Rev. 77 (2007)

SYMPOSIUM ON LITIGATION MANAGEMENT: Lessons from the Alternative Dispute Resolution Movement., 53 U. Chi. L. Rev. 424 (1986)

Robert M. Ackerman, Disputing Together: Conflict Resolution and the Search for Community, 18 Ohio St. J. on Disp. Resol. 27 (2002) 



[1] Prepared by Lisa C. McManus, Esquire, for the Fifth Annual Oil and Gas Law Colloquium of the Pennsylvania Bar Institute held in Pittsburgh, Pennsylvania in September, 2013. 

[2] Roscoe Pound: The Causes of Popular Dissatisfaction with the Administration of Justice, Presented at the annual convention of the American Bar Association in 1906. Available at http://law.unl.edu/splash/Roscoe_Pound-Causes_of_Popular.pdf.

[3] See 42 Pa.C.S.A. Section 5949, which requires that all mediation communication and documents remain privileged and inadmissible in any action or proceedings, with limited exceptions.

[4] The three districts were the Eastern District of Pennsylvania, the Northern District of California, and the District of Connecticut. Barbara S. Meierhoefer, Fed. Judicial Ctr., Court-Annexed Arbitration in Ten District Courts 14 (and accompanying notes) (1990), available at http://www.fjc.gov/public/pdf.nsf/lookup/courtannarb.pdf/$ File/courtannarb.pdf. 

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