0 – 15 Minutes
In this episode of All Things Marcellus, Attorney Doug Clark of The Clark Law Firm discusses how oil and gas lease agreements are presented to Pennsylvania property owners. Doug explains the gas company’s present a standard form oil and gas lease usually consisting of two to four pages. These gas lease form documents are drafted by smart company lawyers for the benefit of the gas company and not the lessor. These gas lease agreements have evolved over time and are carefully designed to take advantage of Pennsylvania oil and gas law to the benefit of the company and not the royalty owner. The landowner or natural gas right owner must negotiate to have beneficial terms added to the gas lease by way of an attached Addendum. Often gas companies will have their landman present gas lease agreements with addendum terms already provided. These company provided addendum terms must be highly scrutinized because there is a strong chance that these terms initially offered by the company provide little to no protection or benefit to the landowner/lessor.
Too often the property owner focuses on whether there is an attached Addendum and how many Addendum terms are included in the attachment. The focus should not be on the quantity of addendum terms but should be on the quality of the added terms to the gas lease. Another major problem is that gas companies will create misleading “headings” that set the topic for the additional addendum term. Attorney Clark explains that he is seeing a disturbing trend where companies will label an Addendum term as a “no-surface use agreement”, but the language below the “heading” does not match the plain language of the heading itself. The heading gives the strong impression that the company cannot use the surface of your property under any circumstances, but the language beneath the heading says something entirely different and allows the company to drill on your property, install pipelines, or engage in other surface development.
The same holds true with royalty calculation language and Addendum headings. Too often gas companies are presenting addendum terms to landowners and providing headings indicating that the addendum term provides for “royalties without deductions”, but when the meaningful language beneath the heading is reviewed, it is revealed that the landowner will have post-production costs such as pipeline gathering, compression, and transportation fees deducted from the royalty payments. This is a major problem and what attorney Clark views as a trick that unfortunately property owners are repeatedly falling for across Pennsylvania.
Attorney Clark encourages landowners not to trust the company landman to provide them the information that they need to make an informed decision. The landman is either directly employed by the gas or pipeline company, or employed by an land services agency who is been hired by the gas or pipeline company to obtain oil and gas agreements from landowners. Once you understand the adversarial nature of this negotiation process, you understand that you need to protect yourself and secure legal representation from an experience oil and gas lawyer. We need to identify where oil and gas contracts are strong and weak and where loopholes exist that allow the company to maximize their royalty profits to the landowner’s detriment.
15 – 30 Minutes
In this segment of All Things Marcellus, Attorney Clark continues to discuss how gas company landmen present oil and gas leases which are drafted by company lawyers to benefit the company. Doug explains that essentially all of the language that is included in the form lease agreement is specifically in the document in order to benefit or protect the gas company during the lifetime of the gas lease.
Attorney Clark begins to focus on gas company provided arbitration clauses and explains how virtually every gas company in Pennsylvania includes a mandatory arbitration provision in there form gas lease offers. Gas companies do not include arbitration provision in their gas leases because they believe these provisions will benefit the landowner/lessor. These mandatory arbitration provisions are included because the company believes that these provisions will ultimately benefit the company for many important reasons. Gas rights owners and their lawyers must identify negative terms in the form of gas lease and negotiate to change those terms by way of addendum to the gas lease or by deleting negative language from the form lease itself. Sometimes the lessor can literally scratch out and initial negative provisions from the form gas lease presented by the company.
Attorney Clark strongly encourages Tioga County and all Pennsylvania landowners and gas right owners to call The Clark Law Firm before signing any oil and gas agreement. There are a lot of companies active now in Tioga County and north central Pennsylvania, and we need to make sure that we are getting quality oil and gas information to area landowners. Doug stresses the value of oil and gas lease and pipeline agreement “Reviews and Consultations” performed by The Clark Law Firm. It is important to contact in knowledgeable oil and gas lawyer before signing any documents or reaching any agreement with a company. Calling after you sign is too late.
30 – 45 Minutes
In segment three of All Things Marcellus, Attorney Doug Clark explains arbitration provisions in detail and why Pennsylvania oil and gas companies want arbitration provisions in their form lease agreements. There are pros and cons to arbitration provisions, but generally speaking, Attorney Clark believes that the arbitration provisions are extremely beneficial to the company and not the landowner. Why else would oil and gas companies leasing in Pennsylvania require arbitration provisions in their lease forms?
Doug walks through arbitration provisions that preclude jury trials so that landowners and royalty owners cannot have their cases and claims heard by a jury of their peers. Arbitrators who hear cases under arbitration provisions are typically lawyers or retired judges who may have tendencies or leanings towards large corporations as opposed to small landowners. One thing is certain, a property owner will not get a public jury trial by a jury of their peers if they have an arbitration provision in their oil and gas lease.
Another detriment of arbitration provisions is that arbitration proceedings can be very expensive, despite with the company landman may say if you question them on the provision. Companies try to tell landowners and property owners that the arbitration provision benefits them, but really these provisions will most likely benefit the company. Otherwise, why else would the company include mandatory arbitration provisions in their standard lease agreements?
Attorney Clark also discusses how a final arbitration ruling does not have precedential value. Meaning that if the gas rights owner receives a positive arbitration ruling in a case involving royalties to be paid without deductions for post-production costs, that positive arbitration ruling cannot be used in the future by other landowners with similar deduction issues. Gas companies can refuse to settle and defend multiple arbitration cases filed by the royalty owner without the fear or worry that a loss on any major royalty or other issues will be used against them in future proceedings.
As an example, if a gas company takes deductions from royalty payments for 5,000 landowners in a given county, in order to challenge the appropriateness of these deductions, each landowner would have to sue individually in arbitration if they had a mandatory arbitration provision in their gas lease agreement. If the company loses any cases, that loss and the arbitrator’s or arbitration panel’s findings cannot be used against the gas company in any other arbitration or court cases involving the same or similar issues. This is a very powerful arbitration benefit to the gas company. Also, if an arbitrator rules against the company in any case, you can expect that the company will not allow that arbitrator to serve in any future arbitration proceedings involving the company. They keep a list.
In arbitration the royalty owner does not have the ability to appeal any bad rulings by the arbitrator or the panel. If the arbitrator issues a final ruling against you, you have no appeal recourse. This can work to your benefit if you are successful, but if you were not successful, you have no appeal rights whatsoever. You are typically placing your fate in the hands of one or three arbitrators and not a jury of your peers.
Also, it may be misleading that arbitration proceeds are quick and much faster than court cases. This may be true, but is certainly possible that arbitration case can take longer than a court case. The speed of moving forward often is not in your best interest and the time you and your lawyer have to conduct discovery is limited. Shorter and faster, even if true, is not always better.
It is also misleading leading that arbitrations are cheaper. In fact, arbitrations can be much more expensive than trials because you have to pay for the arbitrator’s time and other arbitration fees. Judges, juries and the court system is essentially free beyond the filing fee to initiate the case. Arbitrator fees can often range from $3,000 to $5000 per day and the landowner has to pay half of the arbitration fees in most cases. If there are three arbitrators assigned to a case, that could create up to $15,000 a day in arbitration fees. Companies use the high cost of arbitration as a deterrent against landowners who may otherwise file lawsuits. If you have a contingency fee agreement where you only pay your attorney if you are successful, proceeding through the court system will most likely not cost the landowner anything unless they have to pay cost and expenses if they are successful. However, arbitration fees may deter attorneys from taking cases on contingency fees due to the high cost of arbitration fees. Attorney Clark encourages All Things Marcellus listeners to look at their personal credit card, television and banking contracts to see how arbitration provisions are included in all of these lengthy form agreements. This is yet another example of how big companies love to use arbitration provisions because they see them as being a powerful tool deter litigation and minimize exposure to future lawsuits. Some cynical people may argue that arbitration provisions can give big companies a license to steal from individuals with little bargaining leverage in contract negotiations.
45 – 60 Minutes
In this segment of All Things Marcellus, Attorney Doug Clark of The Clark Law Firm further explains the negative impact for lessors with arbitration provisions in their oil and gas leases. Arbitration provisions take disputes out of the public eye and out of the hands of juries and puts the case before and single arbitrator or arbitration panel in a closed private proceeding. The arbitrators are typically attorneys or tired judges and there is always the possibility that they may be more inclined to side with a large gas company versus the individual landowner, especially if they have worked for oil and gas companies in the past. There is not necessarily any guaranteed bias by an arbitrator, nor should there be, but typically gas companies strongly prefer having a lawyer or ask judge hear a dispute involving a gas lease rather than a group of property owners who serve on local juries.
It is also important to remember that once an arbitrator rules in favor of a landowner or lessor, that arbitrator will be on a list of the companies maintain to make sure that arbitrators who ruled for the landowners in the past do not serve on future arbitration panels. There are many arbitration provisions that require mutual consent on the arbitrator, and a gas company will not agree to have an arbitrator serve on a future panel, or as the sole arbitrator in any future disputes, if that arbitrator has any history of ruling for the landowner in prior oil and gas matters.
Attorney Clark also explains how class actions are a defense for property owners against gas companies who may be improperly short changing their royalty payments and taking inappropriate royalty deductions. For example, if 10,000 people are being short changed a total of $2,000 each year in royalty payments, the result is that a combined $20 million of royalties would be maintained by the company and not paid to the royalty owners. That is $20 million dollars each year! No individual landowner would typically sue a big gas company for a $2,000 yearly royalty loss, but a class-action serves as a powerful vehicle to allow royalty owners to group together to take on gas companies for such things as improper natural gas royalty payments.
Gas companies do not want to expose themselves the class-action lawsuits on royalty issues or any other matter, so they push or require arbitration provisions to make class actions virtually impossible. Remember, there is a reason why the gas company places mandatory arbitration provisions in the gas lease form that they presented the royalty owner. It is because arbitration is anticipated to benefit the gas company, and not the lessor in the lease. Generally, Attorney Doug Clark believes that lessors should fight hard to remove arbitration provisions from oil and gas leases whenever possible. There are many different ways to draft arbitration provisions in oil and gas leases, and typically, and unless drafted by your own experienced oil and gas lawyer, these lease arbitration provisions are going to strongly favor the oil and gas company.