CHAPTER 11 PROFESSIONAL RESPONSIBILITY AND ETHICAL CONSIDERATIONS IN OIL AND GAS ACQUISITIONS

• Jurisdiction: United States

Oil and Gas Acquisitions
(Nov 1995)
CHAPTER 11
PROFESSIONAL RESPONSIBILITY AND ETHICAL CONSIDERATIONS IN OIL AND GAS ACQUISITIONS
James M. Hudson
Hinkle, Cox, Eaton, Coffield & Hensley
Midland, Texas

TABLE OF CONTENTS

SYNOPSIS

I. INTRODUCTION

II. MINIMUM STANDARDS OF CONDUCT

III. ETHICS AND PROFESSIONALISM

IV. DEFINING THE CLIENT AND THE ROLE OF THE LAWYER

A. Suggested analytical framework

B. Situations to Consider

1. Corporations

2. Multiple Parties

3. Single Entity Involving Numerous Parties

4. Serial Representation

5. Role of the Lending Institution

6. Terminating Representation

C. Identifying the Role of the Lawyer

D. Engagement Letters

V. CONFLICTS OF INTEREST

A. Situations to Consider

1. Current Clients

2. Former client

3. Lawyer compensated by third party

4. Lawyer as party to the transaction

VI. CONFIDENTIAL INFORMATION

A. Exceptions to the rule of non-disclosure

B. Situations to consider

1. Current clients

2. Former clients

3. Financing Entity

VII. DUTIES IN NEGOTIATIONS

A. Duties owed to client

B. Duties owed to third parties

VIII. RECENT DEVELOPMENTS

A. Proposed American Law Institute Restatement of the Law Governing Lawyers

B. Specialization

C. Technological advances

IX. CONCLUSION

APPENDIX

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The conduct of a lawyer should be characterized at all times by honesty, candor and fairness. In fulfilling his or her primary duty to a client, a lawyer must be ever mindful of the profession's broader duty to the legal system.

— Order of Adoption

Texas Supreme Court

To educate a person in mind and not in morals is to educate a menace to society.

— Theodore Roosevelt

I. INTRODUCTION

Lawyers are constantly faced with issues of ethics and professional responsibility; such issues are neither isolated nor infrequent. At the same time the legal system, lawyers, and the legal profession itself are under increased scrutiny and criticism.¹ For the most part, lawyers routinely resolve ethical and professional responsibility questions without thinking of them as presenting thorny issues that are difficult, if not impossible, to answer.² This is because ethical and professional responsibility concerns are not simply philosophical matters left to scholarly examination, but form a basic part of the fabric of the legal profession and the lawyer's practice and reputation.

To a large extent, there are well defined guidelines that provide the basis to resolve ethical issues. It has been stated: "The main reason for having ethical guidelines is not to provide a cookbook solution to every practice-related problem, but to aid in the decision-making process for situations that involve ethical questions."³ As a result, it is helpful to review periodically the standards that guide the practice of law. By doing so, we equip ourselves to resolve the issues of ethics and professional responsibility that we constantly face.

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This paper focuses on the practical analysis of ethical and professional responsibility issues that can arise in oil and gas acquisitions. The focus is not on the more philosophical aspects of ethics and professional responsibility.⁴ This paper will examine the applicable standards of conduct by which lawyers must guide their conduct.⁵ It will then apply those standards in the following major areas: identifying the client and role of the lawyer, handling confidential information, resolving conflicts of interest, and exercising duties in negotiations. Within each of those topics, the paper will discuss the applicable disciplinary rules and then identify potential situations where concerns may arise. Finally, some recent developments will be discussed. It is hoped that this approach will alert lawyers to potential problem areas so that a high level of professionalism can be maintained when representing parties in oil and gas acquisitions.

II. MINIMUM STANDARDS OF CONDUCT

Disciplinary rules govern lawyer conduct. Violation of disciplinary rules can subject the lawyer to disciplinary action, even disbarment. Yet disciplinary rules, by their very nature, only establish a minimum standard of conduct. Nonetheless, disciplinary rules are probably the best guide for resolution of ethical issues.

Since the early 1900s the American Bar Association⁶ has been active in establishing these minimum guidelines and disciplinary rules. Originally, in 1908, the ABA issued thirty-two

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canons of professional ethics, which were more aspirational than directional. In 1969 the ABA adopted the Model Code of Professional Responsibility.⁷ The Model Code included broad canons, ethical considerations, and specific disciplinary rules. Then, in 1983, the ABA adopted the Model Rules of Professional Responsibility.⁸ These establish minimum standards intended to provide a foundation of acceptable professional behavior. The Model Rules have been adopted, with various amendments, by thirty-six states and the District of Columbia, and another five states have either adopted some portion or structure of the Model Rules.⁹

For purposes of this paper, the analysis of ethical and professional responsibility concerns will be conducted with reference to the Model Rules. The reader is cautioned, however, to consult the particular rules of the applicable state in order to be informed regarding specific amendments and variations.¹⁰ Differing amendments pose particular problems in those transactions involving representation in several states.¹¹ Lawyers involved in these situations must determine which state's disciplinary rules apply to their actions; however, that can be difficult. For example, Professor Dzienkowski, in his paper on ethical issues in natural resources transactions, discusses the hypothetical where "a Texas lawyer represents a Louisiana corporation which is acquiring oil and gas properties in Texas and Oklahoma, which state's rule of confidentiality should apply if the lawyer discovers that the corporation is involved in future fraud against the seller of the oil and gas properties?"¹² The problem arises because one state's disciplinary rules may prohibit disclosure, while another state's disciplinary rules may require disclosure. The lawyer is placed in a position of possibly violating one state's disciplinary rules no matter what course of action is elected.

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In addition to disciplinary rules, the common law establishes the parameters for malpractice liability for lawyers. Instead of guiding disciplinary action, these common law parameters define when an lawyer may be liable in damages to a client for failing to provide services or carry out a duty owed to the client. Typically the malpractice standards are founded in either contract or negligence theories.¹³ The attorney must be concerned not only with potential liability for negligence to the client, but to third parties as well.¹⁴ Liability to the client is founded on traditional notions of negligence or breach of contract. Under some circumstances, courts have been willing to fashion theories so lawyers are liable to third parties claiming a benefit or ability to sue based on the attorney-client relationship. In those cases, courts have used a balancing test or third party beneficiary theories.¹⁵

More important in the oil and gas acquisition context is the potential liability of the attorney for negligent misrepresentation in a direct action against the attorney independent of any attorney-client relationship. Where a lawyer acts as a negotiator or makes statements of fact on behalf of the client, liability may also rest on the affirmative conduct of the lawyer, rather than a claim that a duty arising from the attorney-client relationship was breached. In such cases, where the lawyer makes the representations on which the third party relies, liability will not be limited by the lack of privity or intended beneficiary status.¹⁶

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III. ETHICS AND PROFESSIONALISM

While disciplinary rules provide a minimum threshold for acceptable conduct,¹⁷ as a profession lawyers should aspire to a higher level of conduct or professionalism. Issues of professionalism pit considerations of the law as a profit-making business against considerations of the law as a profession. In the end, those considerations may be the same.¹⁸ Former Chief Justice Warren E. Burger, who was outspoken on the issue of professionalism, once stated, "[T]he standing of the legal profession is at its lowest ebb in the history of our country due to the misconduct of a few judges and all too many lawyers in and out of the courtroom."¹⁹ Unfortunately, Chief Justice Burger was not alone in his beliefs about the state of professionalism.²⁰

In 1988, the ABA adopted a policy recommendation to encourage lawyers to comply with a creed of professionalism, and approved a draft Lawyer's Creed and Lawyer's Pledge.²¹ In response, some states have adopted variations of the creed.²² The approval of the Lawyer's Creed recognizes that lawyers should maintain a level of civility, honesty, and professionalism over and above the minimum standards imposed by either disciplinary rules or the threat of

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potential malpractice liability.²³ Professionalism, however, is difficult to quantify and its rewards difficult to measure:

Professionalism imposes no official sanctions. It offers no officials reward. Yet, sanctions and reward exist unofficially. Who faces a greater sanction than the loss of respect? Who faces a greater reward than the satisfaction of doing right for rights own sake?²⁴

While the focus of this article is on the practical implications and guidance of the Model Rules, the reader is urged to remember that those rules establish only minimum standards, and that as lawyers we should aspire to something higher for the benefit of our clients, our profession, and our careers.

IV. DEFINING THE CLIENT AND THE ROLE OF THE LAWYER

Many potential traps can be avoided...