Chapter 14 Ethical Considerations in Negotiating Complex Oil & Gas Transactions

Chapter 14 Ethical Considerations in Negotiating Complex Oil & Gas Transactions

BEN STRAWN is a commercial trial lawyer with significant experience in front of juries, judges, and arbitrators. He has represented clients in over 25 trials, arbitrations, and other evidentiary hearings in multiple states, including recent trials in Colorado, New Mexico, and Montana. Ben frequently represents clients in the real estate, energy, and engineering industries in cases involving master service agreements, LLC operating agreements, UCC sales of goods, and other complex contracts, as well as environmental, construction, property, trade secret, and business tort claims. He is equally comfortable representing clients as plaintiffs and defendants. Ben serves on the Board of Trustees for the Colorado Symphony and the Board of Directors for the Faculty of Federal Advocates, acting as the board's president in 2019. Before joining Davis Graham & Stubbs, Ben was a law clerk at the U.S. Court of Appeals for the Tenth Circuit for Judge Neil M. Gorsuch (now Associate Justice, U.S. Supreme Court). In addition to his client engagements, Ben is ethics counsel for Davis Graham & Stubbs.

SARAH RICE CARLSON is an associate at Davis Graham & Stubbs LLP, where her practice focuses on commercial litigation and construction and real estate litigation. Sarah represents and advises clients in all stages of litigation. She has successfully represented both businesses and individuals—as plaintiffs and defendants—in civil cases allowing her clients a balanced view of both sides of litigation. Sarah is a graduate of the University of Denver Sturm College of Law and received her undergraduate degree from the University of California, Santa Barbara. During law school, Sarah served as the editor in chief of the University of Denver Water Law Review. Prior to joining DGS, she clerked for the Honorable Gilbert M. Román, Chief Judge of the Colorado Court of Appeals. Sarah has taught as an adjunct professor at the University of Denver Sturm College of Law, on mediation advocacy and negotiation. Sarah is also on the board of directors for the Colorado Lawyers Committee and was named the Colorado Hispanic Bar Association's representative. She is a graduate of the Colorado Women's Chamber of Commerce 2021 Women of Impact and Influence Leadership Program. In addition, Sarah serves on the planning committee for the Colorado Diverse Attorney Community Circle (CODACC), an initiative seeking to build a community for diverse attorneys in Colorado and develop content for continuing legal education on issues of equity and inclusion. In her free time, she enjoys the Colorado outdoors.

CONTENTS

I. INTRODUCTION

II. DUTIES TO THIRD PARTIES

A. Truthfulness In Statements To Others
B. Transactions and Negotiations with Represented Parties
C. Transactions and Negotiations with Unrepresented Parties

III. DUTIES TO YOUR CLIENT

A. The Duty of Confidentiality - Disclosing Client Information
B. The Duty of Confidentiality - Using Client Information
C. Attorney-Client Privilege

IV. WHEN NOBODY WANTS TO BE A THIRD PARTY AND EVERYONE WANTS TO BE YOUR CLIENT

V. CONCLUSION

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I. INTRODUCTION

Ethics issues abound for attorneys in all practice areas, for dealmakers no less than litigators. This paper addresses a few of the issues most apt to arise when negotiating transactions in the oil and gas space. Like any legal issue, accurate resolution of an ethics quandary requires careful consideration of all relevant facts and legal authorities. This paper therefore is not comprehensive. Many other issues might arise that are not addressed herein, and some of the issues that are addressed might be greatly affected by a particular factual twist that isn't considered here. Still, we hope this proves useful at the bargaining table.

One other circumstance that can greatly affect the answer to a legal question is the applicable body of law. Each state has its own ethics rules (now usually denominated "rules of professional conduct"), and of course, each state has its own substantive law as well (which is relevant to our discussion of attorney-client privilege). Throughout the paper, we cite to the American Bar Association Model Rules of Professional Conduct ("ABA Model Rules"). Almost all states follow the ABA Model Rules to some extent.¹ Still, there are important variations across states, a complete analysis of which is well beyond the scope of this paper.²

II. DUTIES TO THIRD PARTIES

Many of the ethics questions most frequently posed by transactional lawyers relate to their (and their clients') interactions with third parties. The ABA Model Rules have several rules applicable to these interactions, a few of which are considered below.

A. Truthfulness in Statements to Others

Attorneys are obligated to be truthful in any material statements they make to opposing parties or counsel.

In the course of representing a client a lawyer shall not knowingly:

(a) make a false statement of material fact or law to a third person; or

(b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.³

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This rule extends to statements made during the course of negotiating transactions. Starting with subpart (a), the rule requires attorneys to analyze what is a "material fact" or "material law." So what is a material statement? One that is reasonably viewed as important to a fair understanding of what is being gained and given up in a transaction.⁴

But not every statement in a negotiation will be deemed material. The Model Rules recognize that, as part of a negotiation, there are certain statements that are not necessarily statements of material fact, including estimates of price or value, a party's intentions, and the existence of a principal.⁵ If speaking in generics ("the assets don't justify a higher purchase price") an attorney is not invoking a material fact. However, the more specific an attorney gets, the more likely they are getting into material facts ("the seller invested $X million developing the assets over the last 3 years"). The same goes for subjective and puffery statements ("the assets are free of any meaningful environmental defects") versus more objective statements ("the state regulators have never contacted my client with respect to any environmental issues related to the assets").⁶

That being said, Rule 4.1(b) catches attorneys on the other side of an often-overlooked definition of "statements": omissions. The rule bars a lawyer from omitting a material fact when necessary to avoid fraud.⁷ While this should go without saying, an attorney cannot knowingly be complicit in a client's fraud. Moreover, this is a continuing obligation. If an attorney later learns that their work was implicated in an ongoing fraud, some jurisdictions would obligate the lawyer to take action (whether that be withdrawal⁸ from the matter or disclosure).⁹ In addition, Model

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Rule 8.4(c) prohibits lawyers from engaging in conduct involving dishonesty and deceit,¹⁰ with "deceit" being potentially subject to a broader meaning.

B. Negotiations with Represented Parties - the No Contact Rule

Model Rule 4.2 effectively imposes a "no contact" rule as to represented parties:

In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.¹¹

Authorities recognizing the no-contact rule justify its existence because it contributes to the proper functioning of the legal system by (1) preserving the integrity of the attorney-client relationship; (2) protecting the client from the uncounseled disclosure of privileged or other damaging information relating to the representation; (3) facilitating the settlement of disputes by channeling them through dispassionate experts; (4) maintaining a lawyer's ability to monitor the case and effectively represent the client; and (5) providing parties with the rule that most would choose to follow anyway.¹²

The mandates of Rule 4.2 are relatively straightforward: an attorney cannot communicate directly with a party represented by counsel without the consent of the lawyer representing that party. The rule itself is triggered by the attorney knowing the person is represented on the matter to be discussed. This means that the lawyer has actual knowledge of the fact of the representation; but such actual knowledge may be inferred from the circumstances.¹³ Thus, an attorney cannot evade the requirement of obtaining consent of counsel by closing their eyes to the obvious. Generally, however, it is permissible to initiate contact in order to secure information as to whether the person is represented.

The second trigger of Rule 4.2 is that the communication must be about the subject matter of the representation.¹⁴ While attorneys should exercise caution in communicating with represented parties, communicating with a represented person about a different "matter" is

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permissible, even if it involves facts that also relate to a mater in which the person is represented.¹⁵

We discuss several scenarios below that are common in negotiations.

1. The attorney is contacted directly by the represented person.

It is also important to remember that the consent to contact belongs to the person's counsel, not the person themselves. Best practice in this scenario is to contact the person's counsel to establish consent before engaging in direct communication.

2. The "I'm not represented" quandary.

Another aspect of the problem arises when a party claims that it no longer has a lawyer in a matter. In this regard, the authorities have been somewhat inconsistent.¹⁶ The attorney should again...