Mediation vs. Litigation in the Oil and Gas Industry

Introduction

Business law is becoming increasingly complex, and oil and gas companies that face litigation suits from lessees dissatisfied with their contracts or experiences may find themselves confronting additional complexities in court — particularly since public policy favors an increase in the production of oil and gas and may be less patient with the traditional methods used in its production.¹ It is in this manner that parties and courts will face new issues in covenant litigation, whilst parties spend enormous amounts of time and money in endless legal proceedings before arriving at — or failing to reach — resolution, with potential future acrimony as a result. This is the conventional litigious procedure that mediation succeeds in circumventing.

The benefits of mediation are well known. According to Boulle,² surveys of those who have participated in mediation processes consistently reveal unanimous satisfaction with the service. This essay proceeds to describe mediation in all its complexity, detailing the process of mediation, stating its limitations, and describing alternatives. Finally, the essay concludes with a synopsis of the benefits of mediation to the industrial sector in general and to the oil and gas industry in particular.

Overview of Mediation

Mediation is presented here as a favorable option to litigation. Mediation is defined as a process in which a non-biased, third-party professional steps in to a conflict to formulate a win-win situation, enabling both parties to understand each other's position and arrive at mutually desirable and settled terms. Unlike similar interventions such as arbitration, counseling, or litigation, the mediator refrains from actively directing or advising the parties and acts in a purely facilitative capacity.³

The benefits of mediation include the following:

Increasingly popular, mediation is commonly used across a variety of fields, with the commercial sector typically representing one of its largest areas of application.⁵ It is therefore suggested that the oil and gas industry would profit enormously from adopting this medium.

Otherwise known as an alternative dispute resolution (ADR) mechanism, mediation is a process in which trained, neutral professionals help two or more parties negotiate and arrive at a self-determined agreement regarding their particular dispute. Mediation is used in a variety of situations including commercial, domestic, legal, diplomatic, family, and workplace matters.⁶ The Internal Revenue Service, for instance, regularly favors mediation as a method of resolving tax disputes.⁷

Confidentiality of sessions is assumed, with privacy allocated to concerned parties and leakage of information to unconnected members forbidden. As a non-adversarial strategy of dispute negotiation, sessions resemble a win-win process in which parties, through the help of a mediator, attempt to reach mutual benefit, rather than producing a win-lose outcome in which one party loses or a third party is compelled to intervene. The mediator must be wholly impartial and employs various techniques to help the parties negotiate their differences.

The style of mediation falls into three categories: evaluative, transformative, and facilitative. Evaluative mediation differs from the other two in that the practitioner assesses the strength and weakness of each argument in light of how it might appear in court, with settlement as its objective. Transformative mediation, by contrast, sees conflict as a crisis in communication and aims to help the parties improve their communication through conflict-resolution strategies.⁸

The benefits of mediation include prevention of the monetary expense of drawn-out court cases, as well as the stress associated with the legal procedure. Time is also conserved — a court case can drag on for years, whilst mediation may be resolved in several hours. Furthermore, the parties can generally reach a more amicable, less acrimonious agreement than they would through the legal system, where a third party — most often a judge — would impose a decision that would necessarily be unsatisfactory to at least one party. Mediation also offers strict confidentiality to the extent that the legal system cannot compel a mediator to testify in court. Finally, mediation offers the possibility of multiple and flexible resolutions to a dispute and grants parties the empowerment to arrive at the decision themselves — whereas in litigation, the decision is imposed by an external authority.

At times, however, mediation may prove unsatisfactory: complaints remain unresolved or other issues emerge. In such cases, issues not resolved by mediation are referred to court via litigation and addressed by a magistrate, judge, or jury. Similarly, parties demanding follow-up on mediation may also bring their complaint to court for resolution in a comparable manner.

Why Use Mediation in the Oil and Gas Industry

Mediation is often used in commerce and business and is valuable to enterprises because it helps parties arrive at a win-win agreement at a minimum of cost and time. This is particularly relevant given today's complex legal environment, where the rise of international trade law, continental trading blocs, the World Trade Organization, and the anti-globalization movement represent just a few of the institutions that illustrate the global legal complexity facing international businesses today.⁹

Business people who are not versed in the increasing complexities and nuances of the law can be — and regularly are — led by lawyers through lengthy and cost-consuming legal processes in which a person's business may be squandered. Moreover, legalistic procedures, by disappointing one of the parties, often fail to provide closure, potentially allowing the conflict to resurface at some future time. Since mediation is oriented toward the amicable win-win situation, it seems a highly satisfactory resolution for the oil and gas industry to adopt. This is particularly so as the commercial mediator helps parties arrive at a dignified and mutually respectful solution where business proceeds under harmonious, satisfactory conditions.

As with any business environment, the oil and gas industry has problems that are peculiarly its own. One of these involves the fact that an oil company buys or leases land that promises to be a valuable resource for producing gas or oil. The landowner, as lessor, authorizes the oil company, as lessee, to conduct operations on the landowner's property at the oil company's sole risk and expense; in return, the landowner receives consideration consisting primarily of a bonus and royalties.¹⁰

When amicable, this oil and gas lease between landowner and company may last for generations — both parties share a mutual interest in profit from gas and oil production. However, the intermediate interests and goals of lessor and lessee may sometimes diverge and become contentious, giving rise to disputes that require legal adjudication.¹¹ Business law has become ever more complex in the oil and gas sector due to public policy demands favoring increased production, calls for changes in exploration, drilling, and enhanced recovery technologies, and reduced patience for traditional methods of production.¹² Consequently, parties and courts face new issues in covenant litigation, during which enormous amounts of time and money may be spent while the business itself remains at risk.

Gas and oil companies may also find themselves confronted with many unfamiliar and intimidating legal issues, including: ambiguous and confusing terms in oil and gas leases;¹³ the nuances by which gas leases differ from oil leases; how royalties are calculated; mineral rights in oil and gas leases; oil and gas lease terms; oil lease sales; and oil lease pooling. In a world that is becoming increasingly complex — and where oil and gas is an increasingly valued resource — rules and regulations are added almost daily, making the law a tortuous procedure.

Such disputes are often resolved through litigation, but litigation is costly, time-consuming, and potentially damaging to what may once have been an amicable relationship. For these reasons, mediation is the preferable alternative.

Conclusion

The conventional manner in which oil and gas companies have generally settled disputes has been litigation. At its most organized, the industries have often relied on institutions and procedural rules formulated by international bodies such as the Paris-based International Chamber of Commerce, UNCITRAL, the Stockholm Chamber of Commerce, the London Court of International Arbitration, or the World Bank's International Centre for Settlement of Investment Disputes (ICSID). These arbitral tribunals are increasingly chosen by international industries such as oil and gas as the venue for legal disputes, in preference to domestic courts. Alleged advantages of such arbitral proceedings include enhanced neutrality, decreased cost, expertise, confidentiality, more expeditious settlement, and resolution in a less confrontational manner.

Arbitral proceedings are nonetheless costly and time-consuming, and they still produce a win-lose outcome, among other drawbacks.²³ It is for that reason that this essay recommends mediation as an invaluable tool for conflict resolution — one that will likely save the oil and gas industry significant time and money while not only preserving its relationships with other parties but potentially enhancing those connections so that business relationships are established on a mutually agreeable and profitable footing.

References

Barclay, T. New Methods of Adjusting International Disputes and the Future. London: Constable, 2008.

Boulle, L. Mediation — Principles, Process, Practice. Chatswood: LexisNexis Butterworths, 2005.

Simkin, W.E. Mediation and the Dynamics of Collective Bargaining. Washington DC: Bureau of National Affairs Books, 1971.

Cooley, J.W. "Arbitration vs. Mediation — Explaining the Differences." Judicature, Dayton L. Rev., 589, 69–263, 1994.

Hall, Keith. "The Continuing Role of Implied Covenants in Developing Leased Lands." Washburn Law Journal, 49, 313–327, 2010.

Parsely, D. "The Internal Revenue Service and Alternative Dispute Resolution: Moving from Infancy to Legitimacy." Cardozo Journal of Conflict Resolution, 8, 677–715, 2006.

Shade, J. "Oil & Gas and ADR: A Marriage Made in Heaven Waiting to Happen." Tulsa Law Journal, 18, 4, 1994.

Shapiro, D. "ADR and the Environment." Journal of ADR, Mediation and Negotiation, 1, 16–22, 2000.

Thomas W. Walde. "Mediation/Alternative Dispute Resolution in Oil, Gas and Energy Transactions: Superior to Arbitration/Litigation from a Commercial and Management Perspective," 2008.

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