Drafting Techniques

Drafting is an art rather than a science. Every drafter has favorite techniques, and few agree as to what works best. Experts in the area do agree, however, that “if it may be ambiguous, it is ambiguous.”122 Clarity of meaning is the goal, and the following techniques may be helpful.

a) Use of Prefatory Statements of Purpose

When the primary purpose of the farmout can be identified—for example, to preserve a lease about to expire or to test a particular formation—one should include a prefatory statement of that purpose. The courts struggle to make sense of the instruments before them, as do managers in oil companies and their counsel. A clear statement of the purpose of an agreement may avoid disputes or lend support to the interpretation urged.

119. A lease operations clause addresses the problem of drilling operations that are begun, but not completed by the end of the primary term. The clause defines drilling operations, generally deemed to be in progress when continuing for more than a 30-, 60-, or 90-day period, as constructive production for purposes of the lease habendum clause. See E. KUNTZ, J. LOWE, O. ANDERSON & E. SMITH, supra note 5, at 188–98.

120. 351 S.W.2d at 925. 121. Id.

Pasotex Petroleum Co. v. British American Oil Producing Co.123 illustrates the usefulness of prefatory statements. In Pasotex Petroleum Co. the Oklahoma Supreme Court held that a farmee abandoned performance of a farmout agreement when it failed to drill a well to test a deep formation, but completed a well in a shallower formation. The court reasoned that:

Our examination of the record convinces us that the paramount idea and purpose on the part of defendant in negotiating and making the agreements with plaintiff was to secure a deep test well that would test the productivity of the Basal Oil Creek Sand. In addition to the value of a producing well from this sand there was also the important feature of the geological knowledge that defendant would acquire and the influence this would have on defendant in determining whether it would expend the large sums . . . necessary in securing renewals of a large number of leases that would soon expire. Such a test well was not drilled.124 The result turned on the finding of the purpose of the agreement. Extrinsic evidence had to be introduced to prove the point, however. A prefatory statement might have avoided litigation, and made the result more certain.

b) Use Appendices for Standard or Complex Provisions

Many of the farmout agreements collected did not attempt to deal with standard or detailed provisions in the body of the agreement, but instead attached appendices containing these terms.125 This drafting technique offers a number of advantages. First, it makes possible an apparently simple, purpose-oriented farmout agreement. Second, it discourages those who negotiate the agreement from making changes in provisions that the lawyers may view as important boilerplate. Third, the technique minimizes the opportunities for ambiguity or conflict between the terms of the farmout agreement and related instruments, such as the assignment.126

123. 431 P.2d 373 (Okla. 1966). 124. Id at 381.

125. See, e.g., Exhibit A to the agreements of Sun Exploration and Production Company discussed in T. FAY, supra note 3, at 55–58, which includes many of the substantive provisions addressed in this paper in four pages of fine print.

126. A nightmare for the lawyer or administrator working with farmouts is that the terms of an assignment made pursuant to a farmout agreement will be inconsistent with the terms of the farmout. Whether the terms of the assignment comport with the farmout is often a point of dispute between farmor and farmees. See, e.g., Holly Energy, Inc. v. Patrick, 239 Kan. 528, 722 P.2d 1073, 1074–75 (1986). For a discussion of Holly Energy, see infra notes 129–32 and accompanying text. An obvious problem of merger will arise if that occurs. One

Use of appendices has a single, but substantial, disadvantage. That disadvantage is the risk that those negotiating the agreement will regard the appendices as incidental to the transaction and thus not give them the attention that they deserve.127 Negotiators can easily fall into the trap of regarding appendices as unimportant.

c) Define the Terms Used

Persons active in the oil business often think of the industry as a monolithic whole, although the better view probably is as a group of regional industries. Both practices and terminology differ from place to place. Parties therefore must define carefully the terms used in a farmout agreement, either in the text of the contract as they are used or in a separate definitions section.128

Even commonplace terms may be considered ambiguous. In Holly

Energy, Inc. v. Patrick129 the farmout agreement provided that a well capable of producing in paying quantities would earn “that portion of the captioned quarter section situated within the production unit established for that well.”130 The farmor assigned its interest in two full quarter sections, though the spacing pattern for the two wells was only forty acres. The farmor later asserted that the farmee should have received only assignments of the forty-acre well sites. The Supreme Court of Kansas affirmed a trial court’s refusal to grant the farmor relief on a variety of claims, upholding the trial court’s finding that the term “production unit” was ambiguous.131 The court pointedly noted that “it would have been a simple matter for Holly to clearly state in the farmout agreement that only

correspondent who responded to my request for comments, Dean Eugene Kuntz, suggested that the parties might draft the farmout to refer to an assignment to be made “on the attached form of assignment covering the lands, leases and interests, and subject to the limitations set forth, in such form of assignment.” This suggestion would minimize the possibilities for conflict between the terms of the assignment and the terms of the farmout relating to the assignment.

127. See Lamb, supra note 3, at 141 (criticizing the “conglomerate mess” that may result).

128. One of the agreements collected devoted nearly two full pages to definition of terms, including contract lands, leases, earning well, subsequent well, drilling unit, contract depth, well costs, operating costs, leasehold costs, lease maintenance costs, casing point, working interest, working interest percentage, and operator. See also art. II of the short form farmout agreement attached to Bledsoe, supra note 3, ex. 1.

129. 239 Kan. 528, 722 P.2d 1073 (1986). 130. 722 P.2d at 1075 (emphasis in original). 131. Id. at 1079.

one well was contemplated and that if successful Patrick would receive an assignment as to forty acres only.”132 A complete definitions section, though rarely seen, is advisable.