CHAPTER 10 PITFALLS AND PRATFALLS—DIAGNOSING CONTRACT CLAUSES WHICH ARE LITIGATION TRAPS
| Jurisdiction | United States |
(Mar 1984)
PITFALLS AND PRATFALLS—DIAGNOSING CONTRACT CLAUSES WHICH ARE LITIGATION TRAPS
DIVISION ATTORNEY TENNECO MINERALS COMPANY
LAKEWOOD, COLORADO
I. INTRODUCTION
The historic propensity of Americans to resort to litigation at the drop of a hat has caused an ever-increasing number of lawsuits to be filed in the United States. The natural resource industry has not been immune to this litigious American character. As a result, attorneys and other individuals who are responsible for drafting agreements must take into account the very real potential that the agreement being drafted will be the subject of a lawsuit.
The purpose of this paper is to present some diagnostic techniques that the drafter of an agreement may utilize to avoid or minimize future litigation. In addition to discussing diagnostic techniques, various "standard" contract clauses which could be litigation traps for the unwary will be discussed. Possible drafting solutions to these litigation traps will be presented in Daniel Muchow's paper for this Special Institute entitled "Mining Agreement Provisions for Prevention or Minimizing Litigation."
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II. THE LITIGATION AUDIT
The main diagnostic technique that can be used by a drafter in anticipating litigation is the litigation audit. A litigation audit is exactly what the name implies — a careful review of the agreement, clause by clause, to determine what language in the agreement may provide the basis for some future litigation. A litigation audit can vary in its level of sophistication depending upon both the nature of the agreement and the resources available to the drafter.
The simplest form of reviewing a document with an eye for future problems is asking a series of "what if?" questions. This method of review is probably the most common technique used to anticipate potential conflicts. The main advantage to this method is that it's relatively quick and inexpensive. The disadvantage of this technique is that unless the reviewer is quite knowledgeable about current and past litigation, the reviewer will probably not be aware of the litigation traps contained in the agreement. The "what if?" questions should hopefully reveal conflicts between clauses in agreements. The questions should also indicate unforeseen events which could have a detrimental impact on performance of the agreement.
The next level of sophistication occurs when the drafter begins to request a litigation attorney to review particular agreements or individual clauses on a case by case basis. In this situation, the drafter realizes that some of the language needs to be reviewed some of the time. Agreements and clauses which the drafter categorizes as "routine" or "standard" are not reviewed by a litigator. This approach has several positive points. First, the drafter has an
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increasing awareness of the advantages of having a litigator review the agreement. Second, the more complex agreements are reviewed for their litigation potential.
The final level of sophistication (at least at the date of this paper) is the formal litigation audit. The formal litigation audit is a standardized review procedure during which all agreements and contractual clauses are routinely submitted to a litigation attorney for review.
The litigation audit procedure can be compared to other audit procedures which attorneys and business managers are familiar with. For example, everyone is aware of tax audits. Another category of audits for business people are the annual accounting audits by outside accounting firms and audits by a company's internal auditors. In contrast to the litigation audit, tax and accounting audits are usually either an annual event or targeted at specific items. They do not have the continuous nature of the litigation audit.
An audit procedure which is more similar in nature to the litigation audit is the environmental audit procedure used by Tenneco and other companies. The environmental audit procedure combines continuous monitoring by a designated individual(s) at each operation to ensure compliance with environmental laws and regulations with an annual inspection by a team of environmental specialists to make sure that the operation is in fact in full compliance. During the annual inspection, a review is made of the operation's strong and weak points in achieving compliance and suggestions are made for improvement in performance. The goal of the environmental audit is to foresee potential problems and to take corrective action before the problem can occur. The goal of the litigation audit is the same — prevention of potential problems.
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A formal litigation audit could be structured in a number of ways depending upon a law firm's or corporate law department's internal size and organization. One of the ultimate objectives would be to organize an audit procedure which allows litigators to remain litigators and not become contract drafters. Another goal would be to establish more communication between the attorneys responsible for the negotiating and drafting of agreements and the attorneys who would be responsible for any litigation arising from those agreements. A simple rephrasing of a contract clause at the suggestion of a litigation attorney may have the happy result of removing the need for that litigator's services in the future.
Unfortunately, a formal litigation audit procedure has a number of problems which may explain why it is not utilized by most companies and law firms, but always remains a "good idea." First, the cost of a formal litigation audit system in terms of both time and money may be prohibitive, particularly to companies with small, internal legal departments and for the smaller law firms. Second, a proposed transaction may have certain time restraints which preclude any review by a litigator prior to consummation of the deal. A third problem with a formal litigation audit procedure could be a lack of attorneys experienced in natural resources litigation available to serve as auditors. A final problem, and probably the most potent, is inertia. Establishment and management...
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