Conditions Precedent in Farmout Agreements – An Overview
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Published
Nov 14, 2019
Abstract
Conditions precedent to Farmout Agreements (FOA) are critical in ensuring that an agreement is fulfilled under conditions that are protective of the parties’ interests in the agreement. Conditions precedent offer parties an escape route from a project if certain approvals are not obtained or if other unexpected circumstances render the project legally or technically infeasible. In the context of FOAs, parties may make their agreement to a project contingent upon governmental approvals, the farmee’s timely drilling of wells, or environmental assessments, for example. Generally, if one or several conditions have not been fulfilled by a certain date, the parties may have the right to terminate the contract.
As with any contractual clause, ambiguous or contentious conditions precedent are likely to foment disagreement among parties and may result in disputes. Though many ambiguities can be avoided through precise language and careful drafting, it is not always possible to avoid the host of potential disagreements regarding the correct interpretation of a contract. For seamless resolution of disputes, parties to a FOA must carefully select their FOA model in light of the parties’ specific positions and interests.
This article endeavors to provide a limited overview of conditions precedent in FOAs for students and young practitioners, and highlight possible dispute resolution planning techniques for use in practice.
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Keywords
Farmout agreementCondition precedentsTerminationBreak-up feesMaterial adverse conditionsDispute resolution
References
AIPN 2018 Draft Model FOA at https://www.aipn.org/model-contracts/ (last accessed June 19, 2018).
Abbott, Martin G., Fundamental issues and practical requirements affecting the purchase and sale of producing resource properties, 29 Alta. L. Rev. 85 (1991).
Bowman, J, Dispute resolution planning and pitfalls for energy and natural resources disputes, 50 Rocky Mt. Min. L. Inst. (2004) [8-1].
Brown, Earl, Assignments of interests in oil and gas leases: Farm-out agreements, bottom whole letters, reservations of overrides and oil payments, 5 Inst. on Oil & Gas L. & Tax’n, 25, 69–70 (1954)
Butler D, The scope of indemnities, in E. Smith et al. (eds.), Dispute Resolution in International Petroleum Transactions (Rocky Mountain Mineral Law Foundation, 2014).
Butler D, Unpublished paper, in E. Smith, et al. (eds.), Dispute Resolution in International Petroleum Transactions (Rocky Mountain Mineral Law Foundation, 2014).
Cedyco Corp v. PetroQuest Energy LLC, 497 F3d 485, (5th Cir. 2007).
Clark, Mark, and Jessica Neuberger, Drafting effective dispute resolution clauses, in R. King (ed.), Dispute Resolution in the Energy Sector (2012).
Committee on Negotiated Acquisitions, The M&A Process—A Practical Guide for the Business Lawyer (ABA, Book Publishing, 2005).
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Contracting States, at http://www.newyorkconvention.org/list+of+contracting+states (last accessed August 15, 2018).
Derman, Andrew B., and Andrew Melsheimer, Changing the rules of the game: Issues that arise under the 2002 AIPN JOA when a host government mandates a “replacement contract” OGEL 4 (2010).
Derrick, J., Farm-outs, in Renad Younes (ed.), Oil and Gas: A Practical Handbook, (Globe Law and Business, 2nd ed., 2014)
Ellison, R., and D. Waldron, Governing law and jurisdiction clauses, in John LaMaster and Caroline Moran (eds), Oil and Gas Sale and Purchase Agreements: SPAs for International Oil and Gas Acquisitions and Divestitures (Globe Law and Business, 2017).
Farrell, J., Expert determination, in R. King (ed.), Dispute Resolution in the Energy Sector (2012).
Foster, G., Managing expropriation risks in the energy sector: Steps for foreign investors to minimise their exposure and maximise prospects for recovery when takings occur, 23 J. Energy and Nat. Resources L., 36–59 (2005).
Fouret, Julien, and Alexis Mourre, Pre-closing disputes, in Edward Poulton (ed.) Arbitration of M&A Transactions—A Practical Global Guide (Global Law and Business, 2013).
Freedman, Clive, and James Farrell, Energy and natural resources, in Expert Determination (5th ed., 2014).
Harrison, Christopher S., Make the Deal: Negotiating Mergers and Acquisitions (Bloomberg Financial, 2016).
Henn, John, Where should you litigate your business disputes? in American Arbitration Association (eds.), American Arbitration Association Handbook on Arbitration Practice (2011).
ICC Dispute Resolution Bulletin at https://cdn.iccwbo.org/content/uploads/sites/3/2018/07/2017-icc-dispute-resolution-statistics.pdf (last accessed Aug. 20, 2018).
Jones, Kendor P., Something old, something new: The evolving farmout agreement, 49 Washburn LJ 477 (2009).
LaMaster, John C., and Caroline L. Moran (eds), Oil and Gas Sale and Purchase Agreements: SPAs for International Oil and Gas Acquisitions and Divestitures (Globe Law and Business, 2017).
Lewison, Kim, The Interpretation of Contracts (Sweet and Maxwell, 2011) 5th ed.
Lowe, John S., Analyzing oil and gas farmout agreements, 41 Sw. L.J. 759 (1987).
Major, R., A practical look at pre-emptions in upstream oil and gas contracts, 5 I.E.L.T.R.117 (2005).
Martin, A. Timothy, Bifurcation of title in international oil and gas agreements, OGEL 4 (2010).
Martin, A. Timothy, Dispute resolution in the international energy sector: An overview, J World Energy Law Bus 4 (4) (2011).
McManus, L. C., Mediation in oil and gas law disputes, LexisNexis Legal Newsroom (2013).
Miller, Robert, Canceling the deal: Two models of material adverse change clauses in business combination agreements, 31 Cardozo L. Rev. 99 (2009).
Model OGUK SPA at /http://oilandgasuk.co.uk/wp-content/uploads/2015/05/REF09B.pdf. (last accessed April 30, 2017).
NOROG Model SPA at https://www.norskoljeoggass.no/en/ (last accessed April 30, 2017).
Otman, Waniss, High-level conflict and divergence of control in the Libyan Hydrocarbon Industry: Risks and uncertainties to IOCs, OGEL 4(1) (2006).
Oxnard, Paul, and Benoit Le Bars, Arbitration of energy disputes: Practitioners’ views from London and Paris, in Association for International Arbitration (eds.), Alternative Dispute Resolution in the Energy Sector (2009).
Patterson, Robert, Acquisitions and disposals on the U.K. continental shelf: An introduction, 11 International Energy and Taxation Review 248 (2001).
Pereira, Eduardo, Joint Operating Agreements: Risk Control for Non-Operator (Globe Business, 2013).
Poitevent, Edward, II, and Christopher L. Hewitt, Preferential rights, rights of first refusal and options: The whys and wherefores (American Association of Petroleum Landmen, New Orleans, Louisiana 2000).
Roberts, Peter, Contracts for sale, exchange or economic transfer of interests, in E. Pereira (ed.), Encyclopaedia of Oil and Gas Law: Upstream, vol. 1 (Globe Law and Business, 2014).
Roberts, Peter, Petroleum Contracts: English Law and Practice (Oxford University Press, 2nd ed.,
2016).
Rodrigue v. LeGros, 552 So.2d 703, 705 (La. App. 1989) aff’d 563 So.2d 248 (La. 1990).
Schwartz, Andrew A., A “standard clause analysis” of the frustration doctrine and the material adverse change clause, 57 UCLA L. Rev. 789 (2010).
Smith, Ernest, World energy resources: Ownership, control and development, in E. Smith et al. (eds), International Petroleum Transactions (RMMLF, 2nd ed., 2000).
Smith, Ernest, John S. Dzienkowski, Owen L. Anderson, John S. Lowe, Bruce M. Kramer, Jacqueline L. Weaver, International Petroleum Transactions (Rocky Mountain Mineral Law Foundation, 2014).
Tarrant, John, Agreements to co-operate at common law, 25 ARELJ 281 (2006).
Taverne, Bernard, An Introduction to the Regulation of the Petroleum Industry: Law, Contracts and Conventions (Graham and Trotman, London, 1994).
UNCITRAL, Convention on the Recognition and Enforcement of Arbitral Awards: 1958 New York Convention Guide, at www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html (last accessed September 24, 2018).
von Segesser, Georg, Arbitrating pre-closing disputes in merger and acquisition transactions, in Arbitration of Merger and Acquisition Disputes, ASA Special Series No. 24, 17, 26 (2005).
Weems, Philip R., Overview of issues common to structuring, negotiating and documenting LNG projects 8 I.E.L.T.R. 189 (2000).
Wilkinson, John, Introduction to Oil and Gas Joint Ventures (OPL, Ledbury 1997).
Wolf Hollow I, L.P. v. El Paso Mktg., L.P., 472 S.W.3d 325, 336 (Tex. App. 2015).
Wright, Charlotte J. and Rebecca A. Gallun, Fundamentals of Oil and Gas Accounting (Penwell, Tulsa, 5th ed., 2008).
Abbott, Martin G., Fundamental issues and practical requirements affecting the purchase and sale of producing resource properties, 29 Alta. L. Rev. 85 (1991).
Bowman, J, Dispute resolution planning and pitfalls for energy and natural resources disputes, 50 Rocky Mt. Min. L. Inst. (2004) [8-1].
Brown, Earl, Assignments of interests in oil and gas leases: Farm-out agreements, bottom whole letters, reservations of overrides and oil payments, 5 Inst. on Oil & Gas L. & Tax’n, 25, 69–70 (1954)
Butler D, The scope of indemnities, in E. Smith et al. (eds.), Dispute Resolution in International Petroleum Transactions (Rocky Mountain Mineral Law Foundation, 2014).
Butler D, Unpublished paper, in E. Smith, et al. (eds.), Dispute Resolution in International Petroleum Transactions (Rocky Mountain Mineral Law Foundation, 2014).
Cedyco Corp v. PetroQuest Energy LLC, 497 F3d 485, (5th Cir. 2007).
Clark, Mark, and Jessica Neuberger, Drafting effective dispute resolution clauses, in R. King (ed.), Dispute Resolution in the Energy Sector (2012).
Committee on Negotiated Acquisitions, The M&A Process—A Practical Guide for the Business Lawyer (ABA, Book Publishing, 2005).
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Contracting States, at http://www.newyorkconvention.org/list+of+contracting+states (last accessed August 15, 2018).
Derman, Andrew B., and Andrew Melsheimer, Changing the rules of the game: Issues that arise under the 2002 AIPN JOA when a host government mandates a “replacement contract” OGEL 4 (2010).
Derrick, J., Farm-outs, in Renad Younes (ed.), Oil and Gas: A Practical Handbook, (Globe Law and Business, 2nd ed., 2014)
Ellison, R., and D. Waldron, Governing law and jurisdiction clauses, in John LaMaster and Caroline Moran (eds), Oil and Gas Sale and Purchase Agreements: SPAs for International Oil and Gas Acquisitions and Divestitures (Globe Law and Business, 2017).
Farrell, J., Expert determination, in R. King (ed.), Dispute Resolution in the Energy Sector (2012).
Foster, G., Managing expropriation risks in the energy sector: Steps for foreign investors to minimise their exposure and maximise prospects for recovery when takings occur, 23 J. Energy and Nat. Resources L., 36–59 (2005).
Fouret, Julien, and Alexis Mourre, Pre-closing disputes, in Edward Poulton (ed.) Arbitration of M&A Transactions—A Practical Global Guide (Global Law and Business, 2013).
Freedman, Clive, and James Farrell, Energy and natural resources, in Expert Determination (5th ed., 2014).
Harrison, Christopher S., Make the Deal: Negotiating Mergers and Acquisitions (Bloomberg Financial, 2016).
Henn, John, Where should you litigate your business disputes? in American Arbitration Association (eds.), American Arbitration Association Handbook on Arbitration Practice (2011).
ICC Dispute Resolution Bulletin at https://cdn.iccwbo.org/content/uploads/sites/3/2018/07/2017-icc-dispute-resolution-statistics.pdf (last accessed Aug. 20, 2018).
Jones, Kendor P., Something old, something new: The evolving farmout agreement, 49 Washburn LJ 477 (2009).
LaMaster, John C., and Caroline L. Moran (eds), Oil and Gas Sale and Purchase Agreements: SPAs for International Oil and Gas Acquisitions and Divestitures (Globe Law and Business, 2017).
Lewison, Kim, The Interpretation of Contracts (Sweet and Maxwell, 2011) 5th ed.
Lowe, John S., Analyzing oil and gas farmout agreements, 41 Sw. L.J. 759 (1987).
Major, R., A practical look at pre-emptions in upstream oil and gas contracts, 5 I.E.L.T.R.117 (2005).
Martin, A. Timothy, Bifurcation of title in international oil and gas agreements, OGEL 4 (2010).
Martin, A. Timothy, Dispute resolution in the international energy sector: An overview, J World Energy Law Bus 4 (4) (2011).
McManus, L. C., Mediation in oil and gas law disputes, LexisNexis Legal Newsroom (2013).
Miller, Robert, Canceling the deal: Two models of material adverse change clauses in business combination agreements, 31 Cardozo L. Rev. 99 (2009).
Model OGUK SPA at /http://oilandgasuk.co.uk/wp-content/uploads/2015/05/REF09B.pdf. (last accessed April 30, 2017).
NOROG Model SPA at https://www.norskoljeoggass.no/en/ (last accessed April 30, 2017).
Otman, Waniss, High-level conflict and divergence of control in the Libyan Hydrocarbon Industry: Risks and uncertainties to IOCs, OGEL 4(1) (2006).
Oxnard, Paul, and Benoit Le Bars, Arbitration of energy disputes: Practitioners’ views from London and Paris, in Association for International Arbitration (eds.), Alternative Dispute Resolution in the Energy Sector (2009).
Patterson, Robert, Acquisitions and disposals on the U.K. continental shelf: An introduction, 11 International Energy and Taxation Review 248 (2001).
Pereira, Eduardo, Joint Operating Agreements: Risk Control for Non-Operator (Globe Business, 2013).
Poitevent, Edward, II, and Christopher L. Hewitt, Preferential rights, rights of first refusal and options: The whys and wherefores (American Association of Petroleum Landmen, New Orleans, Louisiana 2000).
Roberts, Peter, Contracts for sale, exchange or economic transfer of interests, in E. Pereira (ed.), Encyclopaedia of Oil and Gas Law: Upstream, vol. 1 (Globe Law and Business, 2014).
Roberts, Peter, Petroleum Contracts: English Law and Practice (Oxford University Press, 2nd ed.,
2016).
Rodrigue v. LeGros, 552 So.2d 703, 705 (La. App. 1989) aff’d 563 So.2d 248 (La. 1990).
Schwartz, Andrew A., A “standard clause analysis” of the frustration doctrine and the material adverse change clause, 57 UCLA L. Rev. 789 (2010).
Smith, Ernest, World energy resources: Ownership, control and development, in E. Smith et al. (eds), International Petroleum Transactions (RMMLF, 2nd ed., 2000).
Smith, Ernest, John S. Dzienkowski, Owen L. Anderson, John S. Lowe, Bruce M. Kramer, Jacqueline L. Weaver, International Petroleum Transactions (Rocky Mountain Mineral Law Foundation, 2014).
Tarrant, John, Agreements to co-operate at common law, 25 ARELJ 281 (2006).
Taverne, Bernard, An Introduction to the Regulation of the Petroleum Industry: Law, Contracts and Conventions (Graham and Trotman, London, 1994).
UNCITRAL, Convention on the Recognition and Enforcement of Arbitral Awards: 1958 New York Convention Guide, at www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html (last accessed September 24, 2018).
von Segesser, Georg, Arbitrating pre-closing disputes in merger and acquisition transactions, in Arbitration of Merger and Acquisition Disputes, ASA Special Series No. 24, 17, 26 (2005).
Weems, Philip R., Overview of issues common to structuring, negotiating and documenting LNG projects 8 I.E.L.T.R. 189 (2000).
Wilkinson, John, Introduction to Oil and Gas Joint Ventures (OPL, Ledbury 1997).
Wolf Hollow I, L.P. v. El Paso Mktg., L.P., 472 S.W.3d 325, 336 (Tex. App. 2015).
Wright, Charlotte J. and Rebecca A. Gallun, Fundamentals of Oil and Gas Accounting (Penwell, Tulsa, 5th ed., 2008).
How to Cite
Pereira, E. G., & Lewis, M. J. . (2019). Conditions Precedent in Farmout Agreements – An Overview. International Review of Law, 2018(2&3). https://doi.org/10.29117/irl.2018.0020
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