CHAPTER 11 AREA OF INTEREST PROVISIONS IN MINING AGREEMENTS

• Jurisdiction: United States

Mining Agreements III
(May 1991)
CHAPTER 11
AREA OF INTEREST PROVISIONS IN MINING AGREEMENTS
Willa F. Harasym
Westminer Canada Limited
Toronto, Ontario

TABLE OF CONTENTS

SYNOPSIS

Page

1.0 INTRODUCTION 11

1.1 Area of Interest Provisions Generally 11

1.2 Types of Agreements 11

Option Agreements 11

Joint Venture Exploration Agreements 11

Mining Leases 11

Finders Fee Agreements 11

Grubstake Agreements 11

Confidentiality Agreements 11

1.3 Considerations for Use of Area of Interest Provisions 11

2.0 DRAFTING CONSIDERATIONS FOR AREA OF INTEREST PROVISIONS 11

2.1 Parties 11

Affiliates; Related Parties; Direct or Indirect Acquisitions 11

Successors; Assignees 11

2.2 Description of Area of Interest 11

Legal Description; Distance from Point or from Perimeter 11

Contiguousness 11

Maps 11

Stationary Boundary 11

Expanding/Contracting Boundary 11

Part In/Part Out Acquisitions 11

2.3 Exclusions 11

Mineral Type 11 -

Type of Acquisition 11 -

Prior Interests 11 -

Overlapping Areas of Interest 11 -

Amendment/Relocation of Claims; Amendment/Renewal of Agreements 11 -

2.4 Participation 11 -

Mandatory; Elective; Not All Parties Participating 11 -

Percentage or Other Entitlement 11 -

Right of First Refusal on Disposition 11 -

2.5 Procedures for Participation 11 -

Written Notice; Level of Disclosure; Before/After Acquisition 11 -

Time for Election; Extension of Time re: Title/Environmental Review; Time of Essence 11 -

Cost to Participate; When and How Paid 11 -

Title to Acquisition 11 -

Partial Participation 11 -

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2.6 Expiry 11 -

Termination; Survival; Past Termination or Withdrawal 11 -

Non-Competition Covenant 11 -

Savings Clause Where Rule Against Perpetuities Applies 11 -

2.7 Specification of Remedies 11 -

2.8 Other Issues 11 -

Applicable Law; Arbitration 11 -

3.0 ADDITIONAL CONSIDERATIONS 11 -

3.1 Rule Against Perpetuities 11 -

3.2 Lessening Competition/Anti-Trust 11 -

3.3 Cataloguing and Monitoring Area of Interest Provisions 11 -

3.4 Competing Areas of Interest 11 -

3.5 Avoidance of Other Area of Interest Conflicts 11 -

3.6 "Implied" Areas of Interest 11 -

4.0 CONCLUSION 11 -

Appendix "A" Area of Interest (Right to Participate) Drafting Checklist 11 -

Appendix "B" Sample Area of Interest Provisions (Right to Participate) 11 -

Appendix "C" Sample Area of Interest Provisions (Right to Participate) - Excerpt from Model Form Mining Venture Agreement - Form 5 11 -

Appendix "D" Sample Non-Competition Covenants - Excerpt from Model Form Mining Venture Agreement - Form 5 11 -

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1.0 INTRODUCTION

1.1 Area of Interest Provisions Generally

"Area of interest" provisions (also referred to as "area of mutual interest" or "area of influence" provisions) in mining agreements are those contractual terms contained within a main agreement dealing with the primary aspects of the parties' ongoing relationship, which govern the rights of the parties to the agreement to acquire an interest in mineral (or associated) rights within a specified geographical area.

Area of interest provisions may adopt one of several different forms:

election to participate in acquisitions — should a party to the agreement acquire an interest in mineral rights within a specified geographical area, the other party or parties may elect to participate by acquiring an allocated portion of the acquisition, usually at cost;

mandatory inclusion of all existing and/or future acquired interests — all existing and/or future mineral interests of a party within a specified geographical area are subject to the main agreement;

prohibition on acquisitions — a party is prohibited from acquiring any mineral rights within a specified geographical area for a period of time (i.e. a form of covenant not to compete).

There can be no "standard form" area of interest provisions for use in all circumstances. The writer submits that the differing facts, issues and intentions of the parties which form the basis of any mining agreement weigh heavily against a draftsperson relying on area of interest provisions used in a previous transaction without detailed critical review and amendment.

It is the writer's experience that those individuals who are responsible for negotiating the business terms of a transaction are generally not familiar with the many issues and implications of area of interest provisions. A draftsperson should guide the parties to address the pertinent issues and to flesh out their intentions.

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While area of interest provisions are commonly found in mining agreements, judging from the dearth of reported cases which refer to mining area of interest issues, those provisions have not been a frequent subject of litigation. Their common use in oil and gas agreements has on the other hand provided for the development of a significant body of case law. This paucity of mining case law is perhaps due to the infrequency of discovery of and nature of economic ore bodies relative to the frequency of discovery of and nature of oil and gas wells. There are however, many issues and legal principles which are common to area of interest provisions — whether contained in mining or oil and gas agreements. Thus it is submitted that reference to discussion and analysis of area of interest provisions and their interpretation by the courts as they relate to oil and gas agreements, can provide guidance for mining counsel in drafting and interpreting mining area of interest provisions¹ . As a mining practitioner, the writer is not infrequently called upon by mining company personnel to interpret area of interest provisions as they may apply to proposed acquisitions or to disputes over acquired interests.

While area of interest provisions may seem of minor cause for concern at the time of drafting, it is of interest to contemplate that a dispute over their application in a particular fact scenario is most likely to develop in circumstances when there is a significant mineral discovery on lands partly or wholly within the area of interest (and presumably the stakes will be big)² . The concern of the draftsperson who has drafted the area of interest provisions in dispute is whether they will stand scrutiny and be found to adequately address the area of interest issues and the parties' intentions with respect thereto.

1.2 Types of Agreements

Area of interest provisions are likely to be found in the following types of mining agreements:

Option Agreements

As a term of an option to acquire a mineral interest, the parties may agree that mineral interests located in an area of interest which may be acquired by the optionee during the term of the option be required to be included as part of the property under the option. From the optionor's point of view, it is protected from competition by the optionee in the vicinity of its property and receives a benefit to the extent that any acquisitions within the area of interest are undertaken because of results obtained from work on the optioned property. From the optionee's viewpoint, it permits work expenditures which may be required to exercise

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the option to be incurred on these newly included interests. To the extent that acquisitions from time to time are included in the definition of the property under option, an optionee should be aware that upon expiry of the option without exercise, the optionee will obtain sole title to the acquired interests along with regaining sole title to the property originally optioned.

Joint Venture Exploration Agreements

Whether or not combined with an option to earn-in, the parties to a mineral joint venture agreement who are jointly funding the exploration of a mineral property are likely to want the right to proportionately share in the acquisition of additional mineral interests within an area of interest. In addition to protecting the parties from competition among themselves (and the presumably superior knowledge or understanding gained by the operator), this ensures that all parties to the agreement can benefit from the technical data generated by the joint venture which may have led to such acquisitions³ . Where the joint venture agreement incudes an earn-in option, the considerations referred to above under "Option Agreements" apply.

Mining Leases

A lessor may require that mineral interests within a specified distance of the leased property will be subject to the production royalty or other benefit due on the leased property. In this instance, the lessor feels that it is the lessor's efforts which have permitted the lessee to position itself in the area and the lessor should be able to participate in further opportunities which the lessee is thereby able to take up.

Finders Fee Agreements

A party who has developed or accumulated technical information over a geographic area but is not in a position to conduct adequate levels of exploration or development there, may act as a finder in bringing another party to the area and in return taking a benefit from any discoveries on acquisitions resulting therefrom.

Grubstake Agreements

A party may agree to fund the prospecting for, and exploration of, mineral properties within a specific geographical area in return for the right to participate in any such properties.

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Confidentiality Agreements

Within the past decade it has become standard practice within the mining industry to require that a party which wishes to review technical data relating to a mining property with a view to negotiating some form of business transaction involving the property or its owner, enter into a formal confidentiality agreement prior to being given access to the data. The first purpose of such an agreement is to ensure that the data remains confidential from other parties. The second purpose is to ensure that it is not used by the viewer for any purpose other...