High risk, high reward. We in the oil and gas industry have been toughened; have been forced to learn to traverse the risk, and to reap the rewards. Heck, oil and gas exploration and production is practically as synonymous with the "American Dream" as we can get. The plentiful rewards that lie at the end of a successful oil and gas venture lead many into an epic journey fueled by palpable ambition and great effort. We've all heard amazing tales tracing the paths of the oil and gas trailblazers, the ones who got lucky, and those who were willing to sacrifice to get there (if not, see "The Prize"). But every possible path to high reward is guarded by a common vault-door: acceptance of high risk.
Unfortunately, as these stories show us, this risk to reward balance can and has lead many to lying, cheating, dishonesty, half-truths and otherwise misleading conversations, deals and agreements (again, see "The Prize"). However, this is all directly in conflict with the prevailing "unspoken rule" in the oil and gas business: honesty and fair dealing. Call it what you will, "old boys club," "gentlemen's business," "good ol' boys," etc. The oil and gas industry is undeniably all about the relationships you have built, and the trust and rapport you have developed.
Nevertheless, in helping my clients negotiate and close all sorts of deals and resolve various disputes, I have inevitably ran across several "dirty tricks" and "cheap moves." The following is an explanation of some of these dirty or cheap oil and gas negotiation tactics, how to avoid them, and suggestions for responding when the tactics are spotted.
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The Tactics, the Moves, and How to Counter Them
1. Temporarily Disabling Redlining:
Version control goes by many names, such as "contract redline," "revision control," and "track changes." Its use has drastically increased the speed and efficiency at which parties can trade contract negotiations back and forth. The changes can be spotted almost instantly, and the essence of negotiations can be finely tuned. It is immediately obvious if parties have "redlined" a document.
So where is the dirty negotiation tactic? More times than I'd like to count, I have seen parties return a document with several redlined changes, and a few changes that have been made while the tracking software is turned off. As you can imagine, a business person or attorney reviewing the contract may be prone to "fast-forwarding" through the document to only review the changed terms. If the reviewer was not keen enough to deliberately seek out these "hidden changes," and the changes didn't immediately jump out at them, then these latent changes may be accidentally left in the final agreement.
So what do you do? Unfortunately, you have to be somewhat paranoid, and have your word processing software compare the documents every time. This rule applies no matter how much you trust the other side; you never know when someone new has worked on the document at some stage, and you may not know for sure if you can trust the other side's attorneys.
If I ever find "hidden changes" I will immediately make this known to the opposing side, and politely demand two things: (1) an explanation of their intentions, and (2) a "changes tracked" copy on their time.
However, as a final note I do need to point out that this can happen between perfectly honest parties. Sometimes a party will forget to turn on the "track changes" feature, and will later remember. Similarly, when multiple attorneys review a document, some may use the feature while others don't. However, these aren't perfect excuses, as upon this realization they really should make sure to supply this party with a complete tracked changes copy.
2. Signing the Wrong Agreement:
Negotiations typically go something like this: one party has its attorneys draft an initial offer, then other side's attorney goes through and makes deletions, changes, and additions, and the parties go back and forth with discussions and new "redlines" until a final deal has been made. Then one of the parties will go first in executing the agreement, will PDF the docs, and send them to the other side.
The dirty trick, however, lies in this: the first party to sign will send back the wrong agreement. Sometimes it is the original offer, sometimes it is a version or two in the past. More often than it should happen, the innocent party will sign this wrong agreement assuming the other side was honest and sent back the correct version. Since the agreement was an older version of the correct document, it is likely to appear familiar.
A couple things can make parties even more susceptible to falling victim to this tactic. First, where a party's "higher-ups" and/or attorneys that were highly involved in the negotiations, and therefore more likely to spot changes, have turned the deal over to another team prior to execution. Second, a party may be more susceptible if they prefer to have their attorney "redline" the documents, but for them to be the sole point of contact and communicator. This is a risky move, because the attorney may not ever have the chance to review the "execution copies," and the client may have very little chance of finding some of these small but crucial changes.
How do you avoid this one? First, your attorney really ought to be able to scan the documents and look for small changes to a few of the points that were tossed back and forth throughout negotiations. But a simple scan isn't thorough enough. Historically, you would have to painstakingly check both documents word for word. One shortcut, that certainly has its shortcomings, is to compare only the leftmost word of each row. However, a tech-savvy attorney can OCR the signed PDF, and then do a "compare changes" with the approved agreement in DOC form. (For those who are unaware, OCR refers to the recognition of text characters in a scanned image by computer software). I have also seen companies insist on executing only the execution page, and attaching a scan of this page directly to the digital text copy of the agreement (of course, you should check if this is valid in your jurisdiction).
3. Changing Terms After Giving Approval
This dirty trick is very similar to the method above, but has a twist. After both parties have given the "ok" to the latest agreement, I seen a crucial number, date, or other term changed in the copy signed and sent back. Again, OCR, and review by the attorney that negotiated the deal is the best method to offset this risk. If you have fallen victim to this cheap move, you need to check with your attorney - your jurisdiction may have claims you could raise as a defense, such as fraud, unilateral mistake, etc.
4. Omitting Agreed Upon Changes
Yet another similar trick is to omit changes you have agreed to. Many times, parties will come to a largely approved agreement, but a few last terms remain to be determined. Over one last final phone call or email, they will finally agree to these last changes, and one party will agree to make those last revisions, immediately execute the copy, and send it back over. The dirty trick I have seen pulled here a few times is failing to actually make the changes before executing the documents. Assuming that these changes have been made, the other party will sign this agreement, that is supposed to contain these terms. Sometimes this is an honest mistake or miscommunication; but either way it calls for the same defense tactic: thorough proof reading.
5. Feigning Backing Out
Some of the easiest, most enjoyable, most fair, and mutually beneficial agreements I have seen came through a reasonable negotiations process where both sides understood the crucial terms of the deal for both sides. We focused on what mattered, and respected what the other side needed. Now, of course, relaxed negotiations aren't always possible, either because the margins of the deal are so very small, or because we're on the other side of the table from a "gunner," a "strong-armer" or a "tough guy." These "negotiation heroes" simply refuse to budge on an important point, and then may threaten to walk out of the deal. This is annoying, and often unfair. The dirty tactic, however, is to pull this move during the eleventh hour, when the vast majority of the deal has been negotiated, and after all parties have invested considerable resources into pursuing the deal.
Don't get me wrong, sometimes changing a word here or there can be extremely important; but to feign backing out of a deal 99% of the way through, over a non-deal-defining term, is a downright cheap move. Even worse, however, is to demand a large concession during the eleventh hour, due to some sort of change in circumstances. In my experience, the only way to counter this move is to call their bluff and hold your ground. After all, it is unlikely the other side would have expended the resources to move 99% of the way through a deal just to back out at the end over a non-crucial term. Similarly, why would anyone go 99% the way through a deal knowing that the terms they were willing to close on were different than what the other side was willing to accept?
6. Re-trading the Deal, aka the "Forgotten Issue"
A similarly dirty trick is to come to an agreement, then, prior to signing the final deal, attempt to reopen negotiations. Now, sometimes the circumstances can change, or something new will come to light. I have seen several "Letters of Intent" signed with one set of terms, then when we get a copy of the first draft agreement, some of these points turn up the complete opposite. My tactic here is the same as for "Feigning Backing Out." All you can do is stand your ground, and call their bluff. Referencing their willingness to accept the deal before can be helpful as well; after all, nobody wants to be a liar, or develop a reputation for not sticking with their word.
7. Failing to Sign the Agreement
This dirty trick is most likely to be seen between E&P companies and oilfield service companies, or in other deals where fast-timing is of the essence. The parties will largely agree to terms, but will begin working before the deal has actually been signed. Later, when some issue arises, they will act as though no agreement was yet binding and that negotiations were still open. You should check with your attorney regarding your jurisdiction, because in several jurisdictions, partial performance is a method of acceptance. In other words, the fact that there has been performance means that the agreement actually has been entered into.
8. The Walkout
Similar to the "feigning backing out" move, this one involves walking out of the deal, and sometimes is paired with a dramatic temper tantrum. It is typically seen in negotiations regarding a loss, damages, or some other sort of dispute resolution session. You really need to determine why the party walked out, as it will determine what your next best move likely should be. If they are simply disinterested in your offer or the deal, then let them walk out, and follow up later. Nothing you can really do here.
On the other hand, if they dramatically walked out, then they have usually shown their deck of cards. They need the deal, and that gives you an idea of the power you actually have in structuring the terms. Give it some time, let them come back to the table, keep your cool and make your best effort to determine the terms of the deal they can't live without. As discussed I briefly discussed last week in my article on negotiating Farmout Agreements, it would also be crucial to understand their BATNA.
9. The Roaring Brains
The final dirty trick and cheap move I'll discuss in this article is what I call the "Roaring Brains." Sometimes parties will, either themselves or through their attorneys, attempt to win every negotiation point by providing lengthy theories or rationales as to why the deal supposedly has to be structured in the way they suggest. To be clear, this only a dirty trick when it concerns unfair terms and the attorney has been asked to manufacture reason out of thin air.
Sometimes, however, this is a sign of lack of experience, lack of confidence, or lack of social skills. But the skilled negotiator will be able to tell when this is actually a sign that the term is a "must have" part of the deal, or when it causes some other issue to be suspicious.
For example, I was assisting a buyer in the negotiations of a Purchase and Sale Agreement a few months ago, where the definition of "Knowledge" was at issue. The seller's attorney demanded that the only reasonable definition was "the actual knowledge of [the business development director that helped broker the deal]," ostensibly because (1) he is the business development guy, not the operations guy so he shouldn't have a duty to investigate as the plain "knowledge" may import, (2) the Seller didn't want to warrant the knowledge of employees that no longer work for them, (3) apparently it would be too difficult to call the operations team and seek their input, and (4) no one else had been involved in the deal, and so it wouldn't be fair for the BD director to be charged with violating something that was known by an "outside party." The Seller's attorney did a lot of talking, and very little listening. From the Buyer's standpoint, the BD guy had nothing to do with operations, and so was much less likely to be aware of the issues on which we were seeking information. In other words, we were asking the Seller to let us know of any problems the people who actually operated the properties knew of. Limiting the information we were provided to the 'actual knowledge of the guy that never operated the properties' felt meaningless to the Buyer.
After seeing this tactic, my client believed the Seller was trying to "play dumb" and hide known issues with the properties. We told the Seller its lack of willingness to budge on this limited definition of "knowledge" made it look like they were hiding something, and that all we wanted is for them, being the party in control of the properties the past fifteen years, to let us know anything we should know. Further, we were even willing to limit this duty to actual knowledge, and limit it further to the specific limited categories of issues we had listed. Once the Seller understood that their demands appeared to be dishonest from our standpoint, and once the nature of our inquiry was explained, the BD director sidestepped the attorney and made a concession on the term.
Conclusion
The oil and gas industry is highly rewarding, but mother nature herself has burdened this reward with high risk. The temptation for parties to engage in dirty tricks and cheap moves in negotiations and dispute resolution is so real that parties must be wary and protect themselves. Furthermore, being geared with the best tools, and recognizing some of these tactics can be key to reaching a fruitful agreement or fair compromise.
