CHAPTER 11 MINING AGREEMENT PROVISIONS FOR PREVENTING OR MINIMIZING LITIGATION
| Jurisdiction | United States |
(Mar 1984)
MINING AGREEMENT PROVISIONS FOR PREVENTING OR MINIMIZING LITIGATION
Evans, Kitchel & Jenckes, P.C.
Phoenix, Arizona
Mining agreements are prime candidates for litigation avoidance drafting techniques. The euphoria associated with the signing of a mining agreement, often heightened by the parties' expectation of a highly successful operation, can rapidly deteriorate to animosity.1 This can lead to litigation and its negative aspects, primarily high costs and lengthy delays.2
Efforts at reducing the chances for litigation, undertaken at the time of drafting a mineral agreement, may offer the greatest prospect for success. Other so-called litigation avoidance techniques, including mediation, conciliation and arbitration, are merely alternatives to litigation. Through the use of various drafting techniques, however, parties to a mining venture may, at the outset, enter into an agreement which may considerably reduce, if not totally eliminate, the chances for judicial resolution of disputes arising out of the agreement.
This paper proposes several methods or concepts for drafting mining agreements. Various mining agreement provisions which are in use today will be used as examples of these drafting concepts. The concepts and examples described in this paper are not limited to any particular form of mining agreement and, in the proper context, may successfully be used in both mining and oil and gas leases, options, exploration agreements, service contracts and joint venture or operating agreements. The particular provisions discussed in this paper must, however, be considered for their appropriateness prior to using them in any particular agreement.
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I. DRAFTING MINING AGREEMENTS — IN GENERAL.
Although there is some literature on the general subject of drafting agreements,3 there is a dearth of literature with respect to drafting agreements with a view toward avoiding or eliminating the possibility of litigation.4 This is probably due, in part, to the recognition among lawyers that, implicit in the preparation of any agreement, is the requirement to draft it so as to minimize the chances for litigation. As a practical matter, clients expect this and part of the reason for their desire for an agreement is to avoid litigation. Furthermore, there is probably an ethical obligation on the part of lawyers to prepare agreements with a view toward eliminating potential pitfalls, including unwanted or unnecessary litigation.5
The drafting of any mining agreement must begin with a thorough analysis of the client's needs and desires as well as the circumstances surrounding the proposed mining operation. The bulk of this information will be provided by the client. At the start of any proposed mining operation, clients normally will have in mind specific concerns that they want covered in the agreement. These concerns generally do not, however, extend to all matters that potentially could lead to litigation. Additionally, the negativism associated with litigation is in sharp contrast to the euphoria which, as mentioned above, is often shared by the parties at the time of entering into a new mining venture. Emphasis on the possibility of future litigation may therefore result in a feeling that the lawyer is too preoccupied with future disaster and is, in fact, delaying the planned successful mining operation. For these reasons, it may be difficult to focus the client's attention on matters which potentially could invite litigation.
Nevertheless, it is imperative that the agreement not only include those provisions which are important to the client, but consideration must also be given to myriad other provisions that can reduce the chances for litigation. In a lease or lease and purchase option agreement, for instance, the parties often
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are concerned with the amount of royalties or minimum royalties to be paid, work requirements, provisions for completing annual assessment work, if the agreement involves unpatented mining claims, and possibly the right of the lessor to take royalties in kind. Similarly, in an operating or joint venture agreement among mining companies, contributions of the parties, the amount of each party's working interest, the initial exploration program, proposed mining techniques, and selection of a manager or operator, are often paramount in the minds of the parties. It is left up to the drafter to consider and include in the agreement provisions relating to less palatable subjects such as indemnity, insurance, default and forfeiture, notice provisions and similar clauses and provisions which may be successful in avoiding future litigation.
Mining agreements lack the uniform standardization of their oil and gas counterparts. This is attributable in part to the lack of uniformity among mining operations resulting from the many different types of minerals, differences in mining methods and the localities in which mineral deposits are found.6 There are, however, various forms of mining agreements in existence. Because of the unique character of each mining operation, these forms are best used as a starting point for drafting the agreement. They have the additional benefit of serving as a checklist that the drafter may use to assure consideration of each provision listed in the form. Not every listed provision may be needed in the particular agreement being drafted. Use of the form will, however, require the drafter to consider the applicability of each form provision. This in itself is a very useful litigation avoidance drafting technique.
Three approaches to the drafting of mining agreement provisions are proposed that can help reduce the changes for litigation arising out of mining agreements. Examples of typical mining agreement clauses utilizing each of the drafting approaches will be provided. The approaches outlined herein are not isolated methods of drafting. On the contrary, they should be used in
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conjunction with each other to provide the greatest assurance that the agreement will be kept out of the courtroom.
II. DRAFTING MINING AGREEMENTS — A PROPOSED METHODOLOGY.
A. Definitional Approach to Drafting Mining Agreements.
The first approach to drafting mining agreements with a view toward eliminating litigation is the definitional approach. As its name implies, it is an attempt to define each provision of the agreement carefully so that nothing important is omitted. It also requires anticipating and providing for every conceivable situation which might arise under the agreement. If done properly, there will no gaps or holes in the agreement and, therefore, no question as to what will happen upon the occurrence or non-occurrence of any specific event.
This so-called definitional approach is really nothing more than careful drafting. It is what lawyers have always done in the drafting of all types of agreements.7 It requires the elimination of ambiguities, careful definition of all terms used in the agreement, and a specified procedure for what is to occur in any given situation. Theoretically, if this approach is meticulously followed in an agreement, there should be no chance for litigation because nothing has been left to doubt. This approach has the ancillary benefit of providing interested third parties, such as governmental regulatory authorities, lenders and investors, with a greater sense of security in the proposed mining operation.
The obvious shortcoming with this approach is that it requires 20/20 foresight. It is virtually impossible to anticipate and include in an agreement provisions covering every event that may later occur. Additionally, no matter how carefully the agreement is drafted, a party is never totally precluded from seeking judicial redress. Therefore, although this approach can significantly reduce the chances for litigation, it is not failsafe. It should be used in conjunction with the other drafting approaches discussed below.
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B. Preventive Approach to Drafting Mining Agreements.
The preventive approach to drafting mining agreements is in direct contrast to the definitional approach. It recognizes that, regardless of how carefully the agreement is drafted, a party can always seek judicial resolution of disputes.8 The preventive approach anticipates specific instances in which litigation may occur and either provides alternatives to litigation or contains provisions in the agreement which may be detrimental to a party initiating litigation. In this manner, provisions are incorporated into the agreement which serve as a direct deterrent to litigation.
An example of an alternative to litigation is the operator's lien commonly found in both mining and oil and gas operating agreements.9 Without the operator's lien, the operator would likely have an action in most jurisdictions against the nonoperator upon its failure to meet required cash calls. The operator's lien provision is, therefore, an alternative which, in many instances, may directly prevent litigation. Examples of provisions utilizing the preventive approach which are not direct alternatives to litigation but which may deter a party from initiating litigation include provisions for allocation of attorneys' fees and choice of law and choice of forum provisions. Although these provisions will not directly prevent litigation, they may, if properly drafted, cause a party to think twice before initiating litigation.
Use of provisions incorporating the preventive approach may require extra expense and time to render them valid. For instance, documentation conforming to applicable state law may have to be prepared and filed for record in order to render an operator's lien effective.10 If provisions are used which are in the nature of liquidated damages clauses, they may be subject to invalidation if they are interpreted as a penalty provision.11 In spite...
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