Law AREAS OF INTEREST

A commonly used method of defining an area of interest (or rather the interests that will become subject to the agreement) is to include any interests that touch or adjoin any interests that are already subject to the agreement. As a general comment, this type of definition is best avoided as it can cause problems and is easily, in practice, avoided. The first rule of areas of interest is to provide in the agreement what the intended scope of the joint venture is to be and, if it is to include an area of interest, make sure that that area and the interests to be included are precisely defined. The use of latitudes and longitudes, townships, county or municipal designations (for example, lot, range, concession), or other descriptions that are easily confirmed on the ground, should be used.

The second rule is to provide clearly what interests are to be included:

* Are all interests to be included or only certain ones? For example, are on ly mining claims acquired by staking to be included or are all interests, regardless of how they are acquired, to be included?

* If the boundary of an acquired interest straddles the boundary of the area of interest, is it considered to be in or out?

* If an acquired interest falls within an area of interest but is part of a “block” of interests, some of which are outside the area, is the entire block to be considered to be within the area of interest or only that part of it which lies within the boundaries of the area of interest?

* Is the area of interest to be ever expanding as further interests are acquired, or is it to have finite dimensions? Areas of interest that are defined in terms of a specified distance from the boundary of the “property” (that is, the interests that are subject to the agreement) may, without some appropriate wording, end up expanding as further interests are acquired and added to the “property.”

* Is the interest to be automatically included under the agreement? Interests acquired by an operator of a joint venture are probably appropriate to be included automatically, but it may be advisable to have interests acquired by other parties included only by election. It must be remembered that to include an interest will increase the costs of maintaining the entire property in good standing and, if it is an optioned interest, may well represent considerable extra obligations. In addition, if the agreement requires property to be returned in good standing for a specified period of time, any added interests will, in the absence of provisions to the contrary, probably be subject to this requirement; accordingly, the logic that if an automatically included interest is not wanted it may simply be returned, may be expensive to implement.

Finally, consider the question of the term of currency of an area of interest provision and set it out in the agreement. If no term is specified, it will continue for the life of the agreement. In circumstances where a party may become a non-participant and be diluted down to a small carried interest, usually a royalty, this means that the non-participant will benefit from any subsequent interests acquired, even though the non-participant is being “carried.” It is preferable to provide for a specific term defined to be until the expiry of a period of time or to a specified date or until the occurrence of a specified event, such as the termination of the right of a party to earn an interest, the delivery of a feasibility study, etc.

Another matter that should be addressed is whether a party is to be reimbursed for acquisition costs and, if it is, how. Yes, the question of “whether” is appropriate. Some area of influence provisions are really area of exclusion provisions that provide that a party shall not acquire any interests in the area for a specified period of time. These agreements usually go on to provide that if this provision is breached the acquired interest is automatically included under the agreement. Accordingly, an appropriate question to consider is this: the party having breached a provision of the specific agreement, is it appropriate to penalize that party? If a penalty is considered to be appropriate, it may be that the acquiring party will not be reimbursed for its costs. The usual manner of reimbursement is cash or a credit to required contributions pro rata to the party’s interest under the agreement.

As with most concepts that may be included in arrangements between parties, the inclusion or exclusion of an area of interest provision deserves a little forethought. Karl J. C. Harries is a graduate mining engineer and partner with the Toronto law firm of Fasken & Calvin. The information in this article is summary and general in nature and is not intended to be taken or acted upon as legal advic e.

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