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Resolving A Dispute With Your Oil And Gas Company

By Paul R. Yagelski, Esq.

You have a dispute with your oil and gas company, and you have not been able to work it out.  The dispute is serious enough that you are contemplating legal action. What can you do?  Where do you go?  Do you file a lawsuit?

If you cannot work out your dispute with the oil and gas company, absent a provision in your oil and gas lease that specifies what you must do if there is a dispute, there are three options:  filing a lawsuit, mediation, or arbitration.

Legal Action in State or Federal Court to resolve a dispute with your oil and gas company

If your oil and gas lease provides that a dispute between the parties is to be resolved in state or federal court, then absent an agreement by the parties to pursue an alternative dispute resolution procedure, a lawsuit will have to be filed to determine the dispute.   Sometimes, the oil and gas lease does not provide for any option to resolve a dispute.  If this is the case, then unless the parties agree to mediation or arbitration, (alternative dispute resolution procedures), a lawsuit will have to be filed in either state or federal court, whichever would be legally appropriate, to resolve the dispute.

The advantage of filing a lawsuit in state or federal court is that there are specific rules that regulate the procedure, including discovery.  On the other hand, filing a lawsuit in state or federal court is usually the most time consuming and most costly option available.  Further, the oil and gas companies normally have deeper pockets than the royalty owner, thus giving the oil and gas companies an advantage.  As such, the alternative dispute resolution procedures of mediation and/or arbitration should be considered when your oil and gas lease is being negotiated.  If there is nothing in the oil and gas lease addressing dispute resolution or if the lease that is offered provides for litigation in state or federal court, you should nevertheless discuss with your oil and gas attorney whether a mediation and/or an arbitration provision should be negotiated.

Mediation to resolve a dispute with your oil and gas company

Mediation is an alternative dispute resolution procedure.  It is an alternative to filing a lawsuit in state or federal court to resolve your dispute with your oil and gas company.  Unless it is required by your oil and gas lease, mediation is voluntary, meaning that both parties have to agree to mediation as the means of resolving their dispute.  Mediation can be agreed upon even if the oil and gas lease specifies that a lawsuit must be filed in state or federal court or arbitration must be pursued to resolve a dispute.  If successful, mediation can be the quickest and cheapest way of resolving a dispute with your oil and gas company when the parties cannot resolve their dispute by themselves.

Mediation is nonbinding unless the parties come to an agreement.  In mediation, both parties agree on a mediator.  After the mediator is selected, the mediator gets in touch with the parties and may ask for each party’s position in writing.  This gives the mediator an idea of what the dispute is and where each party stands.  The mediator will then schedule a meeting of the parties at a mutually convenient date, time, and place.

At the mediation, the mediator will meet with the parties to explain what his or her function is.  Sometimes at this meeting, the mediator will request that the parties state their positions while everyone is present.  After this meeting, the mediator will have the parties break into separate conference rooms.  The mediator then goes back and forth, meeting separately with each party in an effort to obtain a resolution.  If a resolution is obtained, the resolution is put in writing and signed by the parties.  This then becomes the agreement between the parties that resolves the dispute.  The cost of the mediator is shared by the parties.

Arbitration to resolve a dispute with your oil and gas company

Arbitration is also an alternative dispute resolution procedure.  Just as with mediation, arbitration is an alternative to pursuing litigation in state or federal court.  When reviewing the oil and gas lease that is offered, check to see if it contains an arbitration clause.  It may not.  It is not unusual to find that there is no method provided for dispute resolution in the proffered oil and gas lease.  It is also not unusual to find that the proffered lease contains a provision for filing a lawsuit in state or federal court in order to resolve a dispute.  In either case, you should seriously consider negotiating an arbitration provision.  Arbitration is normally quicker and less expensive than a lawsuit.  How does arbitration work?

An arbitration provision normally contains language that obligates the parties to proceed to arbitration if there is any issue, problem or dispute that cannot be resolved amicably or through mediation.  Arbitration is normally initiated by one party sending a written demand for arbitration to the other party.  One to three arbitrators are then selected to resolve the dispute.  The location of the arbitration can be designated by the parties or by the arbitrator.  This usually depends on the language of the arbitration clause.  Once selected, the arbitrator will normally schedule an initial conference during which a schedule is set for submissions to the arbitrator and for discovery.  The date of the hearing is also set.  The one disadvantage to arbitration is that there is no requirement for discovery.  This is something that one or both of the parties must request and must be agreed to by the arbitrator.  At the arbitration hearing, the applicability of the rules of evidence is up to the arbitrator.  With a few exceptions, the award of the arbitrator is normally final and binding under both the state and federal law.

The following is an example of an arbitration clause:

RESOLUTION OF DISPUTE AND ARBITRATION PROCEEDING.  Any question, issue or dispute arising out of or in relation to the Lease, which cannot be resolved by the Lessor and Lessee by direct negotiation, will be submitted to mediation.  Either Party shall initiate mediation by giving notice to the other and the parties shall then agree upon a mediator.  If the dispute is not resolved by mediation within 60 days from the date of the notice requesting mediation, either party must initiate arbitration by giving written notice to the other.  One mutually agreeable arbitrator shall determine the question, issue or dispute.  In the event the parties cannot agree on an arbitrator within twenty (20) days of initiation of a question, issue or dispute subject to this arbitration clause, the parties shall have the American Arbitration Association select a qualified arbitrator consistent with the requirement above.  Arbitration proceedings hereunder shall be conducted at such place as the parties mutually agree upon.  The law of the state in which the real property is located shall apply without regard to principles of conflicts of laws.  Each party will be responsible for its own costs and will share the costs of the arbitrator equally.  The arbitrator will conduct the arbitration in accordance with the rules of the American Arbitration Association.  Subject to the determination of the arbitrator, either party may introduce, produce and compel documentation, evidence and witnesses, which they deem relevant.  The question, issue or dispute will be resolved as quickly as possible.  The arbitration award must be issued within 60 days from the completion of the hearing, or as soon thereafter as possible.  The arbitrator shall consider disputed questions, issues and disputes in accordance with and subject to the terms of the Lease.  The arbitration award shall be final and binding.

Each party may apply to state court for injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved.  Either party may also, without waiving any remedy under the Lease, seek from state court any interim or provisional relief that is necessary to protect the rights or property of that party, pending the selection of the arbitrator and the arbitrator’s decision.

The language of an arbitration clause varies.  The clause above requires that mediation take place before arbitration.  This requirement is not present in all arbitration clauses and can be deleted if the parties do not wish to go to mediation.  Whatever the language, however, you should seriously consider having an arbitration clause negotiated. The oil and gas companies have deep pockets, and arbitration is normally less expensive.  With arbitration, the royalty owner can potentially deprive the oil and gas company of this advantage.

If you have been offered an oil and gas lease, one of the provisions that should be considered is a dispute resolution clause.  This is something that should be discussed with your oil and gas attorney.  We can help you.

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