Prior to showing a prospect to a potential buyer, the Seller should insist that the buyer execute a confidentiality agreement regarding any confidential or proprietary information relating to the lands involved therein. While there is no standard form, the typical confidentiality agreement should contain the following key provisions:
I. Definition of Buyer The definition of Buyer usually includes the Buyer’s employees, officers, directors, agents, advisors, lenders, lawyers and other representatives of the Buyer. It may also include the employees, officers and directors of the Buyer’s affiliates. If, however, the Buyer’s affiliates will not gain access to the confidential information, then Buyer should insist that such affiliates not be included within the definition of Buyer.
II. Definition of Confidential Information The Seller will want a broad definition of confidential information, such as the following:
“Confidential information includes, but is not necessarily limited to, geological and geophysical data, maps, models and interpretations and may also include commercial, contractual and financial information relating to the geographical area (Prospect Area) outlined on the plat attached hereto as Exhibit ‘A’ and made a part of this agreement.”
The plat attached to the agreement should clearly and narrowly define the outline of the geographical area covered by the agreement.
III. Exclusions from the Definition of Confidential Information Describing the types of information to be excluded from the definition of confidential information is critical to the protection of the Buyer. Typical exclusions include information that:
a. is already known to, or in the possession of, the Buyer prior to the date of disclosure under the agreement;
b. is already in possession of the public or becomes available to the public other than through a breach of the Confidentiality Agreement by the Buyer;
c. is acquired independently from a third party that represents that it has the right to disseminate such information at the time it is acquired by the Buyer; or
d. is independently developed by, or on behalf of, the Buyer.
The Buyer may also want to negotiate the inclusion of a “mental impressions exclusion” like the following:
“Notwithstanding the return and/or destruction of the material referred to herein, the Buyer and its employees and affiliates may retain mental recollections or other impressions as a result of having reviewed the Confidential Information, Seller agrees that such retained mental impressions shall not in any manner impede or restrict the Buyer or its affiliates from engaging in any aspect of the oil and gas business, or of any other business.”
IV. Term The agreement should provide for a reasonable period of time during which the Buyer must keep the information disclosed about the prospect confidential. Agreements commonly provide for a one or two year term from the date of the agreement.
V. Return/Destruction of Information Most confidentiality agreements provide that the Buyer will return to Seller all confidential information upon request by the Seller. This provision should also provide that Buyer will destroy any notes or analysis derived by Buyer.
VI. Disclaimer of Warranties The Seller should include a disclaimer of warranties to protect itself from a cause of action based on inaccuracy or incompleteness of the confidential information furnished to Buyer. The following is a typical disclaimer:
“The Seller makes no representations or warranties, express or implied, as to the quality, accuracy and completeness of the confidential information furnished to Buyer under this agreement. The Buyer acknowledges the inherent risk of error in the acquisition, processing and interpretation of geological and geophysical data. The Seller, its affiliates, their officers, directors and employees shall have no liability whatsoever with respect to the Buyer’s use or reliance upon the confidential information.”
VII. Area of Mutual Interest Some Sellers may seek to include an area of mutual interest clause in the confidentiality agreement. An AMI provision typically requires Buyer to notify Seller in writing if it acquires any interest within a geographical area defined in the agreement and offer Seller the opportunity to acquire all or a portion of such interest at the same cost and on the same terms and conditions as Buyer. The Buyer should insure that the AMI is clearly and narrowly drawn and does not prevent the Buyer’s acquisition of interests in properties in the general vicinity of the AMI.
VIII. Remedies In the event of the Buyer’s breach of the Confidentiality Agreement, the Seller may sue for money damages and/or injunctive relief.
Susan G. Wright is a partner in the law firm of Willey, Edwards & Wright, Houston, Texas. She practices primarily in the areas of oil and gas title and transactional matters. She can be reached at 713 650-1550 or susan@wewlaw.com
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Feb 28, 2007