CHAPTER 5 ADVANCED PURCHASE AGREEMENT ISSUES
| Jurisdiction | United States |
(Nov 1995)
ADVANCED PURCHASE AGREEMENT ISSUES
Lohf, Shaiman & Jacobs, P.C.
Denver, Colorado
Introduction
Professional Responsibility
Ethics Rules
Malpractice
The Advisory Role in Purchase and Sale Transactions
Hart-Scott-Rodino Notifications
ERISA Issues
Securities Laws
Continuing Liability for Lease Covenant Performance
Unpaid Landowner Royalties
Well Plugging
Ad Valorem Tax Allocations
Future Dissolution of the Seller
Conclusion
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Every purchase and sale agreement seeks to bind the parties to a proposed property transfer, subject only to the buyer's confirmation that the properties are, or at the time of transfer will be, what he believes them to be. The seller wishes simply to dispose of the properties; once the transaction has been consummated, he wishes to minimize his continuing responsibility, receive the promised consideration, and be able to embark upon new business endeavors. The representations, warranties, covenants and conditions reflect the buyer's desires in respect of the property, while the provisions detailing the consideration to be paid, together with the limitations upon survival of representations and warranties, reflect the buyer's desire to be compensated and then to escape, as quickly as possible, from further care in connection with the property.
Under this analysis, negotiating and drafting a purchase and sale agreement should be simple and straightforward; it is, after all, simply a matter of ascertaining a client's objectives and putting them on paper. Experienced lawyers recognize, however, that a great deal more is involved in securing this final written result. Clients who have had little negative experience in past transactions often believe that, because they know their business best, the lawyers are to act merely as scriveners in penning the final agreement that they have negotiated. Such clients may view the lawyers' comments and suggestions when writing the purchase and sale agreement as intrusive, and may complain that the lawyers are changing the deal or, even worse, that the lawyers are actively working to destroy their freely negotiated agreement.
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Other clients may negotiate only the purchase price, interest to be conveyed, and effective date, asking that the lawyers prepare the rest of the necessary "boiler plate" in order to complete the contract. These clients recognize that additional provisions are necessary for their protection, but the fact that they have not negotiated such provisions indicates either that they wish the lawyers to handle such negotiations or, more likely, that they do not fully understand the nature and effect of the concerned provisions. Such clients recognize that a purchase agreement is a longer document, but they do not fully appreciate the elements that contribute to that length.
In both of these cases, and in all varieties in between, the lawyer has an ethical obligation to act as an advisor to the client, clearly communicating the effect of certain provisions and the consequences of inclusion or omission of others. Unless the scope of representation has consciously been limited after consultation with the client, the lawyer is responsible not only for the technical aspects of effecting the parties' agreement, things such as the proper execution and recordation of assignments, but also for communicating to the client potential traps contained in seemingly simple clauses and unexpected pitfalls associated with overlooked items.
The sections which follow explore the source and scope of this obligation to advise, as well as certain areas which commonly prove troublesome in the preparation of purchase and sale agreements. These areas have been selected to highlight problems associated with specialized areas of law which might not immediately be thought to affect an oilfield purchase agreement, as well as those often associated with agreeing too quickly to accomplish a client's well stated, but insufficiently considered, objectives.
PROFESSIONAL RESPONSIBILITY
Ethics Rules
The ABA Model Rules of Professional Conduct1 require that a
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lawyer provide competent representation to his clients, which in turn requires that the lawyer have the "legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation."2 The specialized nature of oil and gas practice and the relatively static level of demand for lawyers in this area have resulted in most oil and gas purchase agreements being prepared or reviewed by lawyers who easily have the knowledge, skills, thoroughness and preparation necessary for such representation.
The Model Rules also require that a lawyer act with reasonable diligence and promptness in representing a client.3 This, as we all know, is a very important factor in the negotiation of oil and gas purchase and sale agreements, for the parties' expectations become increasingly settled as time passes, especially if no objection has been raised in respect of suggested provisions. Comments and objections not raised until the third or fourth draft to language which has appeared unchanged since the first draft receives neither the same degree of consideration nor the same desire to conciliate as comments and objections raised earlier in the drafting process. Such delayed reviews and comments can substantially prejudice the client's position.
Finally, even the highest level of competence and the greatest degree of diligence is of little benefit if the fruit of these abilities and undertakings is not communicated to the client. For that reason, the Model Rules require that a lawyer explain relevant matters to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.4
The Model Rules recognize that a lawyer serves several functions, including acting as an advisor, an advocate, a negotiator, an intermediator between clients, and as an evaluator.5 To fulfill his duty as an advisor, a lawyer must
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initially understand not only what the client has negotiated, but also what the client believes those negotiations have secured. In connection with other commercial transactions, disciplinary proceedings in various jurisdictions make clear that a lawyer is responsible for advising a client of adverse consequences that may follow from entry into an agreement;6 the possibility that there may be more extensive liabilities than the client anticipates;7 and that there may even be consequences quite contrary to what the client intends.8
The lawyer, as advisor, is responsible not only for documenting his client's agreement, but also for identifying and communicating the risk that the agreement either may fail to accomplish the client's objectives or may introduce entirely new risks. The Model Rules specifically note that the lawyer shall exercise independent professional judgment and render candid advice and that, in rendering advice, a lawyer may refer not only to law, but to other considerations such as economic, social and political factors that may be relevant to the client's situation.9 Consequently, as a general rule, a lawyer is responsible for advising the client of any matters known by the lawyer which create a risk that the transaction, if completed as agreed, may not accomplish the client's stated objectives.10
This duty to alert a client to potential adverse consequences is limited to matters within the scope of representation.11 The scope of representation is, of course, a decision
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for the client,12 although a lawyer certainly may limit the objectives of the representation if the client consents after consultation.13
These obligations arise under the Model Rules, and have very real teeth through the disciplinary penalties available in each state, which can include private censure, public censure, suspension and even disbarment. In addition, the particular rules discussed here, those relating to competence, diligence and communication, largely restate the substantive law, which in turn establishes a lawyer's legally required standard of care.
Malpractice
The Model Rules expressly state that they are not designed to provide a basis for civil liability, and that the violation of a rule should not give rise to a cause of action nor any presumption that a legally enforceable duty has been breached.14 While there is much discussion generally as to whether the rules should create a standard of care enforceable in private actions or whether lawyers should be collaterally estopped in civil litigation by findings made in disciplinary proceedings, such discussions are of little concern in connection with the core issues of competence, diligence and communication, where the legal standard of care closely parallels the requirements of the Model Rules.
For example, as a general rule of black letter law, a lawyer promises to have the requisite knowledge for proper performance of his duties and, in accepting an assignment, undertakes to use a reasonable degree of care and skill. As with the Model Rules, such a black letter summary of the law is, however, both too narrow and too broad: if a lawyer is responsible for "knowing" anything, he is responsible for knowing, in addition to applicable statutory and common law, the administrative rules, orders, and even customs of the concerned legal community,15 although he is not required to know, in a testing or examination sense, many things beyond the most elementary legal propositions. Instead, he must recognize potential problems, research applicable legal matters, and exercise professional judgment to determine
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the effect of statute, precedent, and commentary on a particular question.16
Like the Model Rules, it is not enough simply for the lawyer to have that knowledge or to research those issues; the results also must be clearly communicated to the client...
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