CHAPTER 6 ALTERNATIVES FOR HANDLING NONCONSENT IN JOINT MINING OPERATIONS

• Jurisdiction: United States

Mining Agreements Institute
(May 1979)
CHAPTER 6
ALTERNATIVES FOR HANDLING NONCONSENT IN JOINT MINING OPERATIONS
Britton White, Jr.
Holland & Hart
Denver, Colorado

INTRODUCTION AND SCOPE

Events of the past decade have confirmed forecasts of a pronounced increase in multiparty mining operations;¹ and most of us have necessarily become familiar with many variations of agreements governing joint mining operations. Along with this trend, an excellent "standard" form of operating agreement has evolved;² however, significant differences between mining methods and the variety of structures available for joint operations have prevented mining attorneys from taking advantage of standardization to the same extent as our oil and gas counterparts.³ As predicted by the Committee Report presented to the Seventeenth Annual Rocky Mountain Mineral Law Institute,⁴ the Model Form Operating Agreement often serves as a starting point, saving countless hours in negotiating and drafting, but is inevitably altered in substantial respects as negotiations progress toward a final draft.

This paper will focus on the subject of nonconsent,⁵ which as the Committee Report indicated, is the one aspect of agreements for joint mining operations least adaptable to standardization.⁶ Recognizing that the alternative methods for handling nonconsent "almost defy enumeration,"⁷ the Committee did not attempt to draft standard language for each possible variation. Rather, the Model Form reflects one method commonly employed in the industry.⁸ Although many draftsmen borrow freely from the concept and language of its nonconsent provisions, seldom if ever has the author seen the Model Form's approach adopted verbatim in a final agreement. The most valuable contribution which the Model Form makes is to alert the parties and their attorneys to the existence and significance of the nonconsent issue. The advice of one Committee member, T. R. Robberson, should not then go unheeded:

"time is well-spent in drafting a comprehensive clause covering all

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foreseeable contingencies since nonconsent could very well turn an otherwise profitable venture into one without economic justification."⁹

The increasing significance of the issue of non-consent becomes readily apparent when one considers the nature of many joint mining ventures which are currently being formed. We are today witnessing a trend toward more large-scale mining ventures between parties with not only disparate financial capabilities, but divergent and potentially conflicting objectives and internal policies respecting development and use of the mineral in question. It has become common recently for large landowners, such as railroads, Indian tribes, etc., as well as end users of a mineral product, such as utilities and manufacturers, to consider active participation in development and production. The result of this trend has been a steadily growing number of joint mining ventures where it is apparent from the outset that the differing nature, approaches and legitimate goals of the participants practically guaranty future disagreement. If the potential for such disagreement is recognized during negotiations, its negative impact can be minimized or eliminated by means of appropriate nonconsent provisions.

Despite the increasing importance of making adequate provision for nonconsent in the final agreement, it is often a subject which receives insufficient attention in the negotiating and drafting stages. Perhaps this is due to the optimism which sometimes attends the formation of a joint mining venture. While the parties are often willing to argue almost endlessly over such subjects as the operator's fee, they invariably perceive a greater community of interest when the subject of mineral development and production is discussed. It is the responsibility of the attorneys to assure, at the preliminary stages, that such optimism does not render the parties so complacent that they neglect to make adequate provision for nonconsent.

Superficially it may appear that, once exploration has been concluded, the parties will have sufficient knowledge to reach mutual agreement as to when, how and whether to proceed with development. Anyone with experience in this field knows it is possible that even experienced mining companies will disagree profoundly over interpretation of complex geological and economic data. However, during negotiations the parties may all too readily assume that if the mineral potential is encouraging, all will elect to participate, and that if the potential is poor, all will

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mutually agree either to wait or to abandon the project. Unfortunately such assumptions are rarely borne out in fact and, as demonstrated below, can lead to many future problems if allowed to persist unchallenged throughout negotiations.

This paper will be limited to joint exploration, development and production operations involving minerals other than oil and gas. The existence of some formal written agreement will be assumed, as will the preliminary agreement on the part of the parties to participate in an initial exploration program, development operation or first work plan and budget. This paper will deal with the situation which arises later, when one or more participants in the venture decline or are financially unable to proceed with a subsequent operation proposed by the other parties.

First, there will be a brief discussion of the problems which arise when the agreement makes no provision for such nonconsent. Next, an attempt will be made to categorize and enumerate the alternative mechanisms which are available for dealing with nonconsent. Which of these alternatives may be most desirable in a particular venture is almost entirely dependent upon such factors as the relative financial commitment of the parties, the scope of contemplated operations, and the particular and perhaps differing self-interests of the parties.¹⁰ The type of nonconsent provision which will ultimately serve the best interests of all parties is, therefore, largely a matter of negotiation. The purpose of this paper is not to recommend the use of any particular mechanism, but rather to familiarize the readers with the numerous categories of alternatives which are available. The principal objective of this paper is to emphasize the importance of recognizing and considering the subject of nonconsent in negotiations, so that it may be dealt with satisfactorily in the final agreement.

Any detailed tax analysis is beyond the scope of this paper. However, it should go without saying that each of the various alternatives for handling nonconsent may entail significant tax ramifications. Not only can these tax considerations be determinative of which nonconsent alternative is most appropriate in a particular transaction, but if it can also be anticipated that the nonconsent provisions will become operative, this may influence the decision as to whether a cost sharing or tax partnership structure should be utilized.¹¹ An effort will be made to identify and discuss in very general terms what the author considers to be some of the more significant tax attributes of the nonconsent alternatives enumerated below.¹² That discussion

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is not intended and does not purport to be exhaustive with respect to the intricate relationship between nonconsent provisions and the U. S. tax laws and regulations. Simply be forewarned that such a relationship exists and, like every other significant decision in life, your choice of an appropriate nonconsent mechanism may require consultation with a qualified tax advisor.

AGREEMENT MAKES NO PROVISION FOR FUNDAMENTAL DIFFERENCES OF OPINION

Even experienced mining companies frequently disagree over the evaluation of technical data. When this occurs, the parties to a joint venture may reasonably differ as to the necessity, desirability, nature or scope of further operations. In addition, it is entirely possible that one party will choose not to participate even in a potentially profitable operation, because it lacks capital, has other more profitable operations in which to invest, or because of countervailing internal corporate policies and priorities. Conversely, it is also possible that one or more parties will desire to proceed with a marginal or even unprofitable operation, due to encouraging market predictions or the need for a reliable and continuing source of the mineral in question.

The disagreement usually first comes to light when the parties discover, at the conclusion of a work plan or operating phase, that they are unable to satisfy the agreement's criteria for approval of the next successive work plan and budget. None of the parties is in default, and each party believes in good faith that there is a legitimate and reasonable basis for its position. The term of the agreement is for a specified number of years and provides for termination prior to expiration only upon mutual agreement, conclusion of operations, bankruptcy of a party or other events not related to the pending dispute.

A typical nonconsent provision, which entitles a party to elect not to participate in an approved work plan and budget, is not applicable.¹³ Neither is arbitration an appropriate procedure for reconciling such disputes which, in any event, are probably not within the scope of the typical arbitration clause.¹⁴ When such situations arise, as they have in the author's experience, it can be extremely discouraging to find little or no guidance in the agreement.

Obviously the problem is less serious if the nonconsenting party is willing to withdraw and assign its

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interest to the others on some negotiated terms, or is willing to allow the other parties to proceed with the operation, recovering the nonconsenting party's share of costs from production. The situation becomes more complicated, however, if the nonconsenting party wishes to retain its interest in the...