Law DEALING WITH DEFAULT

In each case, the property-owner should ask himself “What is the result if the optionee does not perform? How will this affect me?” If the property may be lost through non-performance, the property-owner should try to have some safeguards built into the agreement either to protect against default or to minimize its impact. This problem will arise primarily with respect to interests that may be forfeited if something is not done or if a payment is not made before a specified date. It is uncommon for there to be such concerns with respect to real property (i.e., patented claims, farms and so on) as, in most jurisdictions, forfeiture of this type of title can occur, if at all, only after specified legal requirements have been met (such as notices to all “interested parties,” registration against title, approval of the courts, public advertisement, and so on). In an agreement where default may be disastrous, it might be that:

* title to the property be retained by the property-owner so that he controls filings and payments required to maintain the property in good standing and receives, as the registered owner, any notices relating to the property.

* the optionee be required to fulfil its obligations by a date that is far enough in advance of the earliest due date so that if the optionee defaults, the property-owner has time to rectify the default. This sounds great but, unfortunately, few options are entered into at a time when the due date is sufficiently in the future to permit this “solution,” particularly if payment in lieu of assessment work cannot be made in the relevant jurisdiction. * if the obligation can be satisfied by a payment of money, the optionee may be required to place the required amount in escrow so that it is available to the property-owner and can be paid out by him on or before the due date. This will require the preparation and execution of an escrow agreement — more nuisance].

The number of possible solutions to a problem such as is referred to above are, in theory, limited only by the imagination of the parties. In practice, especially where unpatented claims are concerned, the solution is dictated by how far the optionee will go before he says “take it my way or leave it.” Notwithstanding this basic fact of negotiating life, a property- owner is ill-advised merely to ignore the question of how to protect himself from default. If you do not ask, you certainly will not get anything. From the optionee’s point-of-view, it certainly can do no harm to think about this matter before it comes up in negotiations and to have some idea as to how far to bend, if at all — at least when considering the matter, the optionee will be consciously or unconsciously formulating a corporate policy and, it is hoped, some justification for it.

In a joint venture, the situation can be somewhat different. If the agreement is a farm-in arrangement and the defaulter has yet to earn an interest, the relative positions of the parties are the same as in the option situation, but if the defaulter has an interest in the property, some potentially serious problems can arise. No doubt the agreement will contemplate default, usually with the result being a dilution of the defaulter’s interest — very straightforward, or is it? The continuing party may be faced with committed expenses to pay to third parties. If the non-defaulting party is not already the operator, it is faced with the problem of mobilizing a field crew to see the commitments through and to maintain the property in good standing. The non-defaulting party will also want to obtain from the defaulter the records relating to the property and review these in detail. Unfortunately in some cases, this may be easier said than done, especially if the defaulter decides to be hard to get along with.

The consideration of joint ventures and default does not end here, but it will have to await the next instalment on the subject of defaults. In the meantime, it will be of help to remember that any agreement which contains obligations should have provisions contemplating default and matters following therefrom. However, if the defaulter decides to be difficult and is of little substance (and therefore has little to lose from being difficult), the continuing party is left to rant and rave and threaten or, in extreme cases, to turn to the courts to enforce its rights — a potentially involved, expensive and time-consuming process, even if it will likely end in some measure of success. During all this, the project is probably not being proceeded with and nobody really gains. Accordingly, in the absence of clear provisions in the agreement, the tendency is for the continuing party to attempt to reach some compromise so that the project can proceed — in other words, the defaulter to some extent “wins.”

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