Conditions precedent in farmout agreements : an overview

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.