March 11, 2014 Articles

The Risks of Lurking Fiduciary Duties in Upstream Oil and Gas Deals

Those operating in the oil patch should be mindful of potential allegations that fiduciary obligations are owed.

By Will Taylor – March 11, 2014

Companies that pool resources, share expertise, or apportion the risks and costs associated with oil and gas exploration and production (E&P) often enter into a wide variety of formal and informal business relationships. The structure of these relationships may be influenced by a number of considerations, including the scope of the transaction, the parties’ prior experience of working together, and tax implications. Frequently, these relationships are documented in multiple agreements, such as letters of intent, confidentiality agreements, joint-operating-and-development agreements, or area-of-mutual-interest agreements.

For E&P companies entering into these relationships, a critical consideration for every project should be the existence and scope of fiduciary duties. Dealmakers should be aware of fiduciary duties not just at the contract-drafting phase but also throughout the course of the relationship. This is particularly true when the parties have not clearly defined the scope of their relationship in the agreements between them.

For example, consider two E&P companies that have participated in several upstream oil and gas projects together over a period of several years. One party may consider the relationship to be simply a series of arm’s-length business transactions. Perhaps believing that the relationship has run its course and seeing no prohibitive contractual provisions, this party may decide to pursue related projects with new entities. The other party, upset that it was cut out of these additional opportunities, may attempt to claim that the parties’ relationship extends beyond the contracts between them and rises to the level of a joint venture or partnership where fiduciary duties are owed. According to this party, the parties are not free to engage in so-called side dealing that excludes the other party, and any such activity constitutes a breach of fiduciary duty.

Although contractual provisions eliminating or limiting fiduciary duties may preclude claims such as this in many cases, some courts have looked beyond contractual disclaimers when determining whether fiduciary duties exist. Lack of awareness of these lurking fiduciary duties can lead to costly and protracted litigation.

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