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Basic Contract Principles Impacting Exploration Projects

John W. Broomes, David E. Pierce, Oil & Gas Agreements: The Exploration Phase

“Exploration” is defined as “the investigation of unknown regions.”2 Contract law has always played a major role in managing the “unknown.” The basic premise of American contract law is that parties can agree to order their affairs as they see fit, with minimal intervention by courts and legislatures.3 This remains the model, particularly when dealing with exploration projects where traditional give-and-take bargaining occurs among sophisticated parties. For example, in Nearburg v. Yates Petroleum Corp.,4 the New Mexico Court of Appeals refused to grant Yates a second chance to elect to participate in drilling a well when it failed to respond within the 30-day time frame set by the operating agreement.5 In reversing the trial court's “equitable” approach to the issue, the Court of Appeals states: “A court should . . . not interfere with the bargain reached by the parties unless the court concludes that the policy favoring freedom of contract ought to give way to one of the well-defined equitable exceptions, such as unconscionability, mistake, fraud, or illegality.”6

However, such “freedom” also means courts will be reluctant to rescue a party from what turns out to be a bad bargain. Freedom of contract creates both a “right” and the “obligation” to ensure it is used properly to accomplish your intended goals. The purpose of these Special Institutes on “Oil and Gas A