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08 Dec 2011

Bespoke is better: boilerplate provisions in agreements for overlapping tenements

by Mark Geritz, James Minchinton

Operational, statutory and commercial issues all need to be considered in making agreements for overlapping tenements

Agreements for overlapping tenements require technical, operational and commercial terms to fit within the applicable legislative regime. While the critical element of overlapping tenement agreements will be to discuss the operational interplay between the holders of the overlapping tenements, you also must ensure that all of the contractual terms meet the parties' statutory requirements and commercial needs. Standard contractual boilerplate clauses may not necessarily work in these types of agreements.

In Queensland, neither co-development agreements nor co-ordination arrangements under the statutory overlapping tenure regime (which has been in place for a number of years), have yet been meaningfully tested in court. Parties have nonetheless sought to include a number of terms into overlapping tenement agreements seeking to achieve commercial certainty without legislative or jurisprudential surety.

As well as detailed thought for operational provisions, careful consideration of usually standard boilerplate provisions is required.

Variations

A clause that is often found in agreements is a variation clause that requires the parties to document any agreed variation in writing. In Queensland any amendment or variation to a co-ordination agreement needs to be approved by the Minister.

Any variation clause in such an agreement should reflect not only that consent is required, but that notwithstanding the agreement of the parties, the variation is not to take effect until it has been approved.

Confidentiality

The parties will potentially be exchanging significant and important information about their operational plans and proposed activities on the overlap area. This information will have a commercial value and should be adequately protected by a confidentiality clause. The confidentiality provisions in the agreement must also dovetail with any Confidentiality Agreement entered into between the parties at the outset of negotiations in relation to the co-development agreement.

Information exchanged by parties to overlapping tenement agreements will generally be needed by the other party in order to secure approvals and develop plans in relation to overlapping areas. Confidentiality provisions will generally need to permit one party to use at least some of the confidential information for these purposes. This will be necessary to ensure proper coordination of activities.

In addition, as operational plans may need to be disclosed to various government departments, shareholders or other stakeholders, stringent controls over additional use of that information will need to be retained and exceptions will be needed to confidentiality regimes to allow this to occur.

Term and rehabilitation

Overlapping tenement agreement will generally need to stay on foot until the relevant tenements have expired and until all rehabilitation obligations have been satisfied.

An apportionment of rehabilitation obligations and liability will be needed to ensure that all rehabilitation obligations are ultimately discharged.

Termination

Generally, termination rights in an agreement would seek to restore the parties to their common law or statutory positions. Conferring a right on either party to terminate a co-development agreement or coordination arrangement may not be appropriate in the same circumstances as other types of contract.

In Queensland, the position is additionally precarious for co-ordination arrangements because neither party is permitted to carry out activities on their respective tenements unless there is a coordination arrangement in existence. Ensuring that the co-ordination arrangement stays on foot is an operational imperative for production leases as it prevents both a party in breach and an innocent party from carrying out activities.

Dispute resolution

The primary cause of disputes is likely to relate to operational issues for the concurrent carrying out of activities and in relation to the development of plans for the carrying out of future activities in the overlap area.

The dispute resolution clause will need to be geared towards (but not exclusively reserved for) these types of dispute. Litigation may not be an appropriate forum for dispute resolution where the dispute is about operational issues or the development of future plans, as litigation will only activate where there is a wrong or a default, not where there is merely a failure to agree. Other dispute resolution processes such as expert determination and arbitration may be more useful in resolving these operational types of disputes. Notwithstanding this, litigation may be appropriate for disputes about other aspects of the agreement and these differing options and scenarios should be detailed in the agreement.

Default and damages

As termination is generally to be avoided for breach of these agreements, different default regimes need to be developed.

In the absence of termination provisions, damages are likely to be the primary right of recourse in the event of breach. Careful consideration of default provisions and damages regimes, including likely types of damage or loss that may arise, will be needed before any such clause can be finalised.

Conclusion

Agreements for managing overlapping petroleum and mining interests are increasingly being used to provide certainty of parties' rights. Some legislative guidance is found in several states, most notably in the coal seam gas regime enacted in Queensland. However, in the majority of states, the specific issues have not been fully legislated and the certainty offered by a commercial agreement is becoming increasingly attractive.

To be beneficial, these agreements need to match the legislative regimes in which they will operate and adequately address all exploration and production scenarios that may arise. Standard or boilerplate clauses must not be taken for granted; these must be tailored to match the technical, operational and legislative regimes under which they must operate.

Beware! These underlying issues will vary significantly between projects; each situation will be unique. One size does not fit all in the overlapping tenement environment.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.