5 Basic Elements

RESOURCE LEGAL TRAINING PRESENTS:
5 Basic Elements of
Oil & Gas Contracts
WWW.RESOURCELEGALTRAINING.COM
Resource Legal Training

HOUSTON, TEXAS 77388
Phone 832-298-7791
www.resourcelegaltraining.com
Visit us on-line at resourcelegaltraining.com 1

The BEST training for Land Professionals!
Alyce B. Hoge, J.D., CDOA, CPLTA
Resource Legal Training, Founder
Alyce Boudreaux Hoge is an attorney, a Certified Division Order Analyst and a Certified
Professional Lease and Title Analyst. She was admitted to the State Bars of Texas and Louisiana
and has over 20 years experience in the oil and gas industry.
Alyce received her Bachelor of Arts in History at Centenary College of Louisiana. She received
her Juris Doctorate from Louisiana State University Law School. .
Throughout her 20+ years in the oil and gas industry, Alyce has worked as a landman, lease and
title analyst, division order analyst and legal counsel. In 2006, Alyce founded Resource Legal
Training, a company dedicated to meeting the training needs of land professionals.
Her popular seminars are offered several times a year in Houston, Texas. She also offers in-
house seminars that are customized to the company needs. Current clients include Bill Barrett.,
EOG Resources, Marathon Oil, Chesapeake Oil & Gas and Noble Energy, to name a few.
In 2007, Alyce was a speaker at the National Association of Lease Title Analysts and had the
largest attendance for any speaker ever in the history of the conference.
Her speaking style is described as “humorous and informative” and Alyce is fond of saying she
gives “Legal advice with Cajun spice.” Come see why many consider her training to be the
BEST in the industry!

TABLE OF CONTENTS
CHAPTER 1
The 5 Elements – “LOCAL” 3
Legal Parties - Capacity 4
Offer 6
Consideration 7
Acceptance 8
Lawful Purpose 8
CHAPTER 2
Contract Laws 9
Interpretation 10
Statute of Frauds 11
Recordation 11
Breach 12
Defenses 12
CHAPTER 3
Oil & Gas Contracts 14
AMI 16
Farm-Outs/Ins 17
Joint Operating Agreements 21
INDEX 28
ATTACHMENTS
Lease Guide
Farm-Out Guide
JOA Guide

1
Chapter
Contracts – 5 Basic Elements

This chapter reviews the 5 basic elements of any binding contract. Note that the acronym
“LOCAL” covers all 5 elements.
A
Contract is defined as:
 “An exchange of promises between two or more parties to do, or refrain from
doing, an act.” –Black‟s Law Dictionary
A binding contract is one that is enforceable by a court. To be binding, five basic elements of
a contract must be met. In the absence of any of the elements, you may have an agreement
but that agreement will have no legal ramifications of a contract.
When determining whether a contract exists, the court will attempt to ascertain the intent of
the parties. That is, they will seek to establish whether there was a “meeting of the minds.”
Meeting of the minds is also referred to as mutual assent. Did the parties intend to be legally
bound by the agreement? Did the parties to the contract know they were entering into a
contract and understand the legal ramifications of that contract?
This is an abstract theory and the courts look to actions or external factors to determine
whether a meeting of the minds occurred. If all of the elements of the contract are met, a
binding contract is created. These factors are as
follows:
LEGAL
CAPACITY
Legal Capacity
LAWFUL OFFER
Offer PURPOSE
„LOCAL”
Consideration
Acceptance
CONSIDERATION
ACCEPTANCE
Lawful Purpose

1. Legal Capacity
 Legal Capacity
“The ability to understand the nature and effects of one‟s acts.”
-Black‟s Law Dictionary
Thus, in order to determine whether a meeting of the minds occurred, courts look to
determine whether the contracting parties were capable of entering into the contract. That is,
did both contracting parties have the legal, mental and/or physical capacity required under the
law to enter into a contract?
The Legal Parties or Capacity requirement stems from the courts

desire to protect those who cannot protect themselves. Thus, even
though all of the other elements of the contract are met, courts may
determine that no contract exists because the parties did not have the
requisite capacity. An argument that the parties lacked the capacity to
enter into the contract is a defense to the formation of the contract. In
essence, the argument is that because they are unable to understand the
contract, the contract was never formed.
 Minority (Infancy) - Incapacity includes infancy or whether the party to

the contract was a minor. Courts want to protect children from being taken
advantage of by unscrupulous parties who would use a child‟s age or
inexperience against him in order to gain an unfair advantage. Thus, courts
establish that in order to enter into a legally binding contract, one must be a
“legal party,” that is of the age of majority or at least 18 years of age.
 Insanity or Mental Illness - Insanity or Mental Illness is another form of incapacity.

One who is insane or who suffers from a mental illness may be unable to determine the
impact of being bound by contract. Although some people who suffer from a mental
illness may have an understanding of the contract and its ramifications, courts protect
those who may not by establishing that no contract can be formed by one who has a
mental illness.
 Drunkenness and Drug Abuse - Drunkenness and Drug Abuse are

another form of incapacity. Parties who enter into contracts while under the
influence of a mind-altering substance are deemed incompetent to
understand the impact of their actions. Thus, a contract by one who is
under the influence of such substances entitles them to a defense that the
contract was never formed because the intoxicated party was incapable of understanding
his actions.

Note: The Legal Authority argument is applicable in the oil and gas industry when
engaging in contracts with companies and/or corporations. Typically, companies
designate certain officers with the authority to legally bind the company. Others are given a
Power of Attorney that authorizes them to act on behalf of the company. Absent these
specific designations, a company may raise the defense that no contract was formed because
the party executing it lacked the requisite legal authority to bind the company.

2. Offer
 OFFER-
“An indication by one person to another of their willingness to contract on certain terms
and without further negotiations.”
-Black‟s Law Dictionary
An offer must be definite stating the specifics of the contract. These include:
 Quantity – The specific amount being exchange
 Time – When must the contract be performed
 Identification of the Parties -
 Price
 Subject Matter – what is the person making the offer willing to give?
The Mirror Image Rule

In the law of contracts, an offer must be accepted EXACTLY without modifications. This is
known as the Mirror Image Rule because the acceptance must mirror the offer. That is, if
there is a counter-offer or an attempt to accept the offer on different terms,
Counter Offer the original offer is effectively rejected. Once the counter-offer is made and
= Rejection rejected, the prior offer is no longer available for acceptance. Thus, one who
makes a counter-offer that is rejected cannot then accept the terms of the
original offer. The original offer is “off the table” and negotiations begin
anew, if at all.
Thus, the risk of accepting the offer on different terms as in a counter-offer is that the original
offer dies.
Example: If I offer to buy your house for $200,000 and you accept the offer as is, we
have a binding contract. However, if you say we‟ll accept if you‟ll pay closing costs, the
original offer is modified. If I decide to reject your counter-offer, you can‟t say, “Ok, I
accept the offer of $200,000 with no closing costs,” because the $200,000 offer may no
longer be available.
Counter-Offer – An attempt to accept the offer on different terms.
Counter-Offer = Rejection of Offer

3. Consideration
Consideration is defined as anything of value that is done or promised in return for a
contractual promise. It is a mutual bargain – where both parties give up something of value.
Absent consideration, an agreement may exist, but no legally binding contract is created.
The elements of a consideration are:
1. Something of value;
2. Bargain or negotiation regarding the terms of the exchange;
3. Mutual exchange.
Example: In the example above, each party is giving up something of value – one party
gives up the house while the other party gives up the $200,000.
Purpose of Consideration
Consideration is what converts the agreement to a contract. The goal of consideration is to
ensure that contracts are made by serious parties and not made in error. Thus, consideration
forces the parties to focus on whether or not they want to engage in the contract.
There are three (3) Main Purposes of Consideration:
1. Cautionary – Forces the parties to slow down and really think through whether they are
willing to give up something of value;
2. Evidentiary – Consideration is evidence of the intent of the

parties and their willingness to bargain in good faith;
3. Channeling – Forces the parties to iron out the details of the contract to make sure it is clear
what each party is getting and/or giving up.

4. Acceptance
When the offer is accepted without any modifications, the fourth element of acceptance is met.
Acceptance occurs when it is communicated to the offeree. Thus, if you offer to lease my land
and I accept your offer but don‟t tell you I‟ve
accepted it, no parties are bound.
Communication is what activates the
acceptance and brings the negotiations to a
close.
5. Lawful Purpose
In order to be enforceable, a contract must have a lawful purpose. That is, a
court will not enforce a contract that is against the public mores. For example, a
contract to sell marijuana may have all the elements of a binding contract, but
because since marijuana is illegal, Courts will deem the contract invalid.
Likewise, a contract to hire a hit man may meet all the elements of a contract but because it
breaks the law, it is unenforceable in a court of law.
Once the basic elements are met and a contract is created, there are additional principles of
contract law that apply to the interpretation of contracts and an additional element when
dealing with real property known as the Statute of Frauds.

2
Chapter
Contract Law Principles

This chapter covers the legal principles that govern interpretation of contracts as well as a
discussion of the Statute of Frauds.
W
hen a dispute regarding the terms of the contract results in a lawsuit, courts first
determine whether a contract was formed using the “LOCAL” elements.
However, additional factors will be taken into consideration to determine the
outcome of the dispute. These factors are certain presumptions that come into
play when interpreting the contract.
Four (4) Corners of the Document

The Four (4) Corners of the Document rule is a
presumption in the law that the contract embodies the
complete agreement between the parties. When courts are
called upon to interpret a contract to resolve a dispute, the
focus is on the contract itself without reference to anything
outside of the document (“extrinsic evidence”), such as the
circumstances surrounding its writing or the history of the party signing. The focus is on the
document itself and not on prior conversations, e-mails, texts, voice messages, etc. If possible,
a document should be construed based on what lies within its four corners, unless such
examination cannot solve an ambiguity in its language.
Although this legal principle is applied in all 50 states, California has codified the presumption
by statute:
Where contract language is clear and explicit and does not lead to an absurd result, a court will
ascertain contractual intent from the written provisions of the contract itself and go no further.
(California Civil Code Section 1538, 1639)

Example: Lease with no reference to pooling. Landman can argue that pooling was
negotiated but if it‟s not in the actual document, courts will conclude no pooling
authority by the lessee.
Contracts Construed Against the Drafter

When courts face ambiguous language in a contract, the
ambiguous language will be construed against the drafter.
This is because the law deems that the person who actually
wrote the contract has a greater opportunity to clearly define
the terms of the contract. Thus, an insurance contract is
construed against the insurance company because they had
the superior opportunity to specifically clarify the terms.
Leases Construed Against the Lessee

By the same token, courts determine that clauses in an oil and
gas lease that are ambiguous are construed against the Lessee.
A court presumes that the lessee (oil and gas company) with its
staff of attorneys and land professionals, has a superior
bargaining power over the “little old lady landowner” who may
have limited or no access to an attorney. This is similar to the
Legal Capacities argument where a court protects those who
cannot protect themselves.
The purpose of the presumption is to equalize the bargaining power between the lessee and
the lessor and to motivate the lessee to create a clear and unambiguous oil and gas lease for the
mutual benefit.>>…………………………………………………………………………

Statute of Frauds
The Statute of Frauds states that when a contract impacts real property,
the contract must be in writing and must be signed by the transferor to
be valid.
The Statute of Frauds began in England in 1677. Its purpose was to

close the door to the many frauds and perjuries regarding the transfer of
real property by requiring that certain instruments be in writing to be
actionable in a court of law. The Statute of Frauds has been adopted in
a modified form in all 50 states.
Contracts such as assignments, leases, deeds, Area of Mutual Interest, Farm-Outs/Ins and
other documents relating to real property, must be in writing or the contract is
unenforceable.
Recordation
In order to be binding against third parties, a conveyance of real property must be recorded
in the county/parish records. This means the actual instrument (or a memorandum of
instrument) must be filed in the county/parish records where the property is located to put
the world on notice of the transfer.
Note that recording the contract has no bearing

on its validity. An unrecorded contract is still
valid as between the parties. Recording is a
means to determine who the leasehold owner is
in the event there is a conflict between
competing assignments.
At common law, the rule is first in time, first in

right. Thus, the first party to record the
assignment is the party who owns the right to
the leasehold.

Breach of Contract
Failure, without legal excuse, to perform any promise which forms the whole or part of the
contract is called a breach of contract. If the breaching party has
no legal defense to its failure to perform, courts can either
terminate the contract and/or enforce damages against them.
The “legal excuse” is also known as a “defense to a contract.”

Under contract law there are two defenses available: 1) Defense
against formation of the contract and 2) Defense against
performance of the contract.
Defense against Formation –

A defense against formation of the contract arises when the critical elements of the contract are
unmet. In that case, the court will deem that the contract was never formed and therefore cannot be
enforceable in a court of law.
Defenses against Formation include:
 Incapacity
 Duress
 Statute of Frauds
 No offer/acceptance/consideration
 Illegal Purpose

Defense for Non-Performance –
A defense for non-performance arises when the critical elements of the contract are met but
there is a compelling legal reason to void the contract.
Defenses for Non-Performance include:
 Misrepresentation – A false statement of fact that induces a party

into a contract.
 Impossibility – Excuse for non-performance of a contract based

on a change of circumstances that makes the performance
impossible.
Example: Contract to paint your house on Saturday and on Friday the house burns to the
ground, the contract is formed but cannot be performed due to impossibility. In that case, the
contract is voided.

3
Chapter
Oil & Gas Contracts

This chapter focuses on the elements of various oil and gas industry contracts including Leases,
AMI’s, Farm-Outs/Ins, Joint Operating Agreements, etc.
T
Here are a number of contracts that are common in the oil and gas industry. By
examining these contracts and evaluating the “LOCAL” elements of each, a greater
understanding of these industry agreements may be achieved.
The Oil and Gas Lease

The oil and gas lease is a contract between a mineral owner and an oil
and gas company which gives the company the right to drill and
develop oil and gas deposits on the land for a certain period of time in
exchange for periodic payments to the mineral owner.
So, how does an oil and gas lease meet the basic contract elements of
the contract?
 Legal Parties/Capacity – Assuming there are no issues relating to the age, mental
stability or sobriety of the lessor, the Legal parties to the lease agreement are the rightful
owner of the property. That is, as a review of the county records indicates, the property
owner is one and the same as the lessor.
For the lessee, the rightful party is one who has authority to bind the company.
 Offer - “If you give the right to drill on your property, we will give you periodic payments:
bonus, delay rentals, shut-in royalty, and royalty payments.”
 Consideration – The mutual exchange on the part of the Lessor is

allowing the Lessee to come on to the property and develop it. The
mutual exchange on the part of the Lessee is the payment of periodic
payments.
 Acceptance – Since this is a contract in real property, the Statute of

Frauds applies and actual execution by the transferor of the document is

required to meet the acceptance criteria.
 Lawful Purpose – No laws are violated by drilling for oil and gas.
Recordation – Regardless of whether the contract is recorded, it is still binding as between the
parties. However, recordation serves to put third parties on notice as to the existence of the
contract. If Lessee fails to record the lease and a subsequent lessee does, the subsequent lessee
will have the right to the lease.

Area of Mutual Interest (AMI)
An Area of Mutual Interest or AMI contract basically
designates a particular area, typically by plat and states that
when either party acquires an interest in a lease in the
designated area, they share an interest in the lease.
Advantages of the AMI are:
Uniformity of Interest throughout the contract Area;
Risk and Participation are spread over a larger number of acres;
Unnecessary competition is reduced.
(See Lewis Mosburg www.mosburgoil gas.com/html/mosburg_3_7_99_3a.html)
Here are the elements of the AMI contract:
 Legal Parties –Authority by those executing the contract.
 Offer – If you acquire a lease in the designated area, we own an interest.
 Consideration – If we acquire an interest in the designated area, you own an interest.
 Acceptance –Contract must be in writing and execution constitutes acceptance.
 Lawful Purpose – No laws are violated by sharing lease interests in a designated area.
Statute of Frauds – must be in writing as it impacts an interest in real property.
Recordation – No recordation is required because the AMI itself has no transfer language.
The subsequent assignment, however, would need to be recorded to be binding against third
parties.

Farm-Outs/Ins
A Farm-Out/In is a contract to assign oil and gas acreage in exchange for the drilling or
completion of a specified drilling obligation. Some farm-outs require only well completion to
earn the acreage. Others require actual production before acreage is
earned.
A Farm-out meets the elements of a legal contract as follows. To wit:
 Legal Parties – Must have authority to act on behalf of the

company. Typically, this is two oil and gas companies.
 Offer – Let us drill on your lease and if we are successful you

will get an interest.
 Consideration – On the part of one company, the consideration is allowing another to

drill on your property. For the other company, the consideration is the payment of an
Overriding Royalty or Working Interest should the production be successful.
 Acceptance – Execution of a Farm-Out which must be in writing pursuant to the

Statute of Frauds.
 Lawful Purpose – The contract to drill on another‟s leasehold interest for the
opportunity to gain an interest violates no laws.
Recordation – No recordation required since no transfer of property in the contract itself.

Why Farmout?
 Cost Free - Farmouts give a company the opportunity to have an interest in a
producing well without having to incur any costs of drilling and production
 Saves Expiring leases – In some cases leases are on the verge of expiration and the
Lessee is unable to drill the wells timely. A farm-out affords the Lessee the
opportunity to save the leases by allowing another
company to drill on the property, thereby saving the
leases from expiration.
 No Money to Drill – In some cases, a company may

believe that its leases are valuable but simply lack the
capital to drill. A farm-out gives them the opportunity to
profit in the event the well produces but without having
to shell out the dollars to drill the well themselves.
 Test acreage – A farm-out also gives the lessee the

opportunity to test acreage near the farm-out area to
determine whether further drilling by the lessee is advisable on nearby leases.
 Overriding Royalty Interest (ORRI) – A farm-out entitles the farmor the right to an
ORRI should the well be a producer.

Elements of the Farmout
1. Leases – Identifies acreage and leases covered by the Farm out Agreement.
2. Test Well – The Farmee agrees to drill a Test Well by a specified date, at a specified
location to a certain date. This clause also governs well completion, abandonment and
failure to drill.
3. Wells – This clause covers the situation where the Test Well encounters problems.
This clause gives the Farmee 90 days to drill a substitute well.
4. Costs – This clause provides that all costs and risks are borne by the Farmee.
5. Assignment/JOA Forms - This clause spells out the JOA and Assignment terms
usually by attaching a copy of the form to be used. This clause also covers the rights
earned, typically an overriding royalty interest and an opportunity for the Farmor to
convert its interest from an overriding royalty interest to a working interest. This
conversion may occur upon the payout of the well. Payout is defined as follows:
“…that point in time when Farmee’s accrued net proceeds of

production attributable to the assigned testing, completing and
equipping the earning well and the attributable costs of operating the
earning well during the payout period.”
6. Well Information – This clause provides the Farmor with the right to information
regarding the well such as:
a) Well data;
b) The right of notice of testing and logging operations and
c) Access to the property at all times.
7. Lease Maintenance Payments – This clause identifies

who bears the financial responsibility for lease
maintenance obligations both before the assignment
(Farmor) and after the assignment (Farmee) . It also
provides that neither party will be liable for any error
made in connection with a lease maintenance
payment.
8. Indemnity – Indemnity comes from the Latin and

translates to “no damages." This clause protects the
Farmor from being sued as a result of the Farmee‟s negligence. It basically states that
costs or damages as a result of any lawsuit will be borne by the Farmee, even if the
Farmee is not named in the lawsuit. In the law, indemnity is standing in the shoes of

another party. In essence, “If we get sued, you are paying for all the costs of the
lawsuit including attorney‟s fees, court costs and actual damages.”
9. Insurance - This clause covers the types of insurance coverages required by the
Farmee including Worker‟s Compensation, General Liability, Automobile, Excess
Liability insurance and Operators extra expense insurance.
10. Relationship of the Parties – The purpose of this clause is to ensure no tax liabilities
are incurred as the result of any “partnership.‟ Thus, it states that the agreement “shall
not be construed as creating any type of partnership.”
11. Miscellaneous Provisions – These clauses cover such things as the Farm out being
subject to other agreements, compliance with state laws how to handle Lease
extensions and renewals, how to amend the agreement, binding nature of the
agreement and acceptance within 10 days.

Joint Operating Agreement (JOA)
A Joint Operating Agreement, as its name implies, is an agreement by multiple Lessees to
operate, drill and develop oil and gas properties. Each Lessee
contributes its oil and gas leases for a share of the interest. All
parties to the JOA participate in the first well (initial well) paying
for costs and sharing the profits based on their interest as stated
in the Exhibit A. A single operator is designated, typically the
Lessee with the majority of acreage.
A JOA meets the elements of a basic contract as follows. To wit:
 Legal Parties – Must have authority to act on behalf of the company. Typically, the
parties are multiple oil and gas companies with oil and gas leases in a given area.
 Offer – “If you contribute your leases and pay for your share of the drilling costs, you
will receive a share of the profits based on acreage contributed.”
 Consideration – A Working Interest in the oil and gas properties with the right to
participate in additional wells.
 Acceptance – Execution of the Joint Operating Agreement - must be in writing

pursuant to the Statute of Frauds.
 Legal Purpose – The contract violates no laws.
Recordation – No recordation required since no transfer of property in the contract itself.

Terms of the Joint Operating Agreement
Contract Area – The JOA designates the specified area encompassed by the contract. This
is on the cover page of the JOA and includes a legal description of properties included.
Exhibit B of the JOA provides either a written legal description or a visual of the contract
area via a plat of the legal description.
Figure 1: JOA Cover Page
Cost Sharing - This clause defines how costs are to be divided among the various owners.
It is in Article II. B and states that interests are as set forth on Exhibit A.
Figure 2: JOA Exhibits - Article II

Initial Testing – Article VI specifies the commencement date of the initial well as well as
the location of the initial well. All parties participate in the initial well sharing both the
costs and profits according to their percentage of interest as spelled out on Exhibit A.
Figure 3: JOA Drilling & Development - Article VI.
Subsequent Operations – Once the initial well is drilled, parties then have the option to
participate in additional wells. The party interested in the drilling of an additional well is
referred to as the “proposing party.” The proposing party sends written notice to the
other interest owners giving them 30 days to respond to the proposal. Parties must notify
the proposing party whether or not they “consent” to the drilling of the subsequent well.
If they elect to participate (consent) they will share in the entire cost and risk of conducting
such operations as well as the profits from that subsequent well.
Parties opting out of participation in the drilling of the well are said to “go non-consent.”
The non-drilling or non-consenting party shares none of the costs nor any of the profits
until the well has “paid-out.” Payout occurs once the consenting parties have fully
recovered their costs and then some. Because the consenting parties incur all the risk and
liability of drilling a non-producing well, there is a “penalty,” known as a “non-consent
penalty,” that requires the non-consenting parties to delay receiving a share of the profits
until a certain payout is met.
Under Article VI (B), Non-consent penalties are divided between equipment costs and
drilling costs. For equipment costs, the non-consent penalty is typically 100%. That
means that equipment costs payout once all equipment costs are fully recovered. For
drilling costs, the penalty can range from 300% - 500%, meaning the well must payout 3
times (for 300%) and 5 times (500%) before the non-consent parties can get a share of the

profits. The purpose of these penalties is not so much to punish the non-consenting party
but to reward the consenting party for taking the risks and burdens of subsequent wells.
Figure 4: JOA Non-Consent Penalties - Article VI (B)
Operator Powers – One of the key provisions in a Joint Operating Agreement is the
designation of the operator. This decision is critical because it is the operator who will
make critical engineering and strategic decisions that impact the success of the well. The
operator is designated both on the cover page of the JOA as well as Article V (A).
Figure 5: JOA Operator Designation A- Article V(A)
Other operator powers are stated under Article VII(D)(3) which gives the operator
expenditure authority allowing him to make decisions and incur costs on amount less than
a given dollar amount.

Figure 6: JOA Other Operations - Article VII. (D)(3)
In addition, the operator is given the expenditure authority to settle lawsuits which are less
than a certain dollar amount. See Article X.
Figure 6: JOA Claims and Lawsuits - Article X
Finally, Article V (B) covers procedures for removal or resignation of the operator.
Figure 7: JOA Resignation or Removal of Operator

Special Rights – The Joint Operating Agreement covers special rights of the parties. One
of the most controversial is known as the “Preferential Right to Purchase.” This clause
basically states that once a party to the JOA decides to sell its interest in the contract area, it
must offer the interest to the other working interest owners first. Many an acquisition has
come to a screeching halt because the Division Order Analysts identifies the existence of
this clause in the JOA. Many JOA negotiations delete this clause but it‟s important to be
aware of, especially if it is left intact.
Figure 8: JOA Preferential Right to Purchase
Miscellaneous Provisions – These clauses cover such things as compliance with state
laws, agreement term, force majeure and procedures for notices and maintenance of
Uniform Interests.
CONCLUSION:
In conclusion, once the basic elements of contracts are understood, application to

oil and gas contracts is relatively easy. Keep in mind courts interpret contracts using the 4
corners of the document, Contracts construed against the drafter and Leases construed
against the Lessee.
Also attached are sample forms of the Oil and Gas Lease, Farm-Out Agreement and Joint
Operating Agreement.

Index
3
30 days, 14
D
deeds, 7
A defense, 3, 7, 8
Defense Against Formation, 7
abandonment, 11 Defense Against Performance of the Contract, 7
Acceptance, i, 2, 5, 9, 10, 11, 13, 16 Defense for Non-Performance, 8
acquisition, 16 Division Order Analysts, 16
agreement, 2, 4, 6, 9, 12, 16 drilling costs, 14
ambiguous language, 6 Drug Abuse, 3
amend, 12 Drunkenness, 3
AMI, i, 9, 10 Duress, 8
Area of Mutual Interest, 10
Article II. B, 13 E
Article V(A)., 15
Article V(B), 15 elect to participate, 14
Article VII(D)(3), 15 elements of a consideration, 4
Article X, 15 equipment costs, 14
assignment, 7 Evidentiary, 4
Assignment, 11, 16 Excess Liability, 12
assignments, 7 Exhibit A, 12, 13
Automobile, 12 Exhibit B, 13
expenditure authority, 15
B
Bargain or negotiation regarding the terms of the
F
exchange, 4 failure to drill, 11
Breach of Contract, 7 false statement, 8
Farmee, 11, 12
C Farmor, 11, 12
Farmout, 11, 12
California, 6 Farm-Out/In, 10
Capacity, 2 Farm-Outs/Ins, i, 9, 10
Cautionary, 4 force majeure, 16
Chanelling –, 5 Four (4) Corners of the Document, 6
Civil Code Section 1538, 1639, 6
Communication, 5
completion, 10, 11
G
consent, 14 General Liability, 12
Consideration, i, 2, 4, 9, 10, 11, 12, 16
contract, 2
Contract, 2 I
Contract Area, 13 Identification of the Parties, 3
convert, 11 Ilegal Purpose, 8
conveyance, 7 Impossibility, 8
Cost Free, 11 Incapacity, 3, 8
Cost Sharing, 13 Indemnity, 12
costs, 4, 11, 12, 13, 14, 15 Infancy, 3
Costs, 11 Initial Testing, 13
counter-offer, 4 initial well, 12, 13, 14
county records, 7 Insanity, 3
county/parish records, 7 Insurance, 12
insurance contract, 6
intent of the parties, 2

J Price, 3
procedures for removal, 15
JOA, i, 11, 12, 13, 15, 16 profits, 12, 13, 14
Joint Operating Agreement, 12, 13, 14, 16 proposing party, 14
L Q
lawful purpose, 5, 10 Quantity, 3
Lawful Purpose, i, 2, 5, 9, 10, 16
lawsuits, 15
Lease extensions, 12
R
Lease Maintenance Payments, 12 real property, 5, 7, 9, 10, 16
leases, 7, 10, 11, 12 Recordation, i, 7, 10, 11, 13, 16
Legal Capacity, 2 Relationship of the Parties, 12
legal defense, 7 renewals, 12
legal description, 13 resignation, 15
legal excuse, 7
Legal Parties, i, 2, 9, 10, 12, 16
Legal Parties/Capacity, 9 S
Lessee, 7, 9, 10, 11, 12, 16 Something of Value, 4
LOCAL, i, 2, 6, 9 state laws, 12, 16
Statute of Frauds, i, 5, 6, 7, 8, 9, 10, 11, 13, 16
M Subject Matter, 3
Subsequent Operations, 14
maintenance of Uniform Interests., 16
marijuana, 5
meeting of the minds, 2 T
Mental Illness, 3 tax liabilities, 12
Mirror Image Rule, 3, 4 term, 16
Miscellaneous Provisions, 12, 16 Test acreage, 11
Misrepresentation, 8 Test Well, 11
Mutual exchange, 4 Time, 3
N W
No Money to Drill, 11 Well Information, 12
non-consent, 14
Wells, 11
non-drilling, 14
Worker‟s Compensation, 12
notices, 16
working interest, 11, 16
written notice, 14
O
Offer, i, 2, 3, 4, 9, 10, 12, 16
oil and gas lease, 7, 9
operator, 12, 14, 15
Operator Powers, 14
Oral Contracts, 5
ORRI, 11, 16
overriding royalty, 11
P
paid-out, 14
parties, 2, 3, 4, 5, 6, 7, 9, 10, 12, 13, 14, 16
partnership, 12, 16
payout, 11, 12, 14
penalty, 14
Potential of test acreage, 11
Power of Attorney, 3
Preferential Right to Purchase, 16

END
30

5 Basic Elements

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RESOURCE LEGAL TRAINING PRESENTS:

Resource Legal Training

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Contracts – 5 Basic Elements

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The Legal Parties or Capacity requirement stems from the courts

 Minority (Infancy) - Incapacity includes infancy or whether the party to

 Insanity or Mental Illness - Insanity or Mental Illness is another form of incapacity.

 Drunkenness and Drug Abuse - Drunkenness and Drug Abuse are

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 Quantity – The specific amount being exchange

 Time – When must the contract be performed

 Identification of the Parties -

The Mirror Image Rule

Counter-Offer – An attempt to accept the offer on different terms.

Counter-Offer = Rejection of Offer

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The elements of a consideration are:

2. Bargain or negotiation regarding the terms of the exchange;

There are three (3) Main Purposes of Consideration:

2. Evidentiary – Consideration is evidence of the intent of the

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Contract Law Principles

Four (4) Corners of the Document

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Contracts Construed Against the Drafter

Leases Construed Against the Lessee

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The Statute of Frauds began in England in 1677. Its purpose was to

Note that recording the contract has no bearing

At common law, the rule is first in time, first in

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The “legal excuse” is also known as a “defense to a contract.”

Defense against Formation –

Defenses against Formation include:

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Defenses for Non-Performance include:

 Misrepresentation – A false statement of fact that induces a party

 Impossibility – Excuse for non-performance of a contract based

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Oil & Gas Contracts

The Oil and Gas Lease

 Consideration – The mutual exchange on the part of the Lessor is

 Acceptance – Since this is a contract in real property, the Statute of

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Advantages of the AMI are:

Uniformity of Interest throughout the contract Area;

Risk and Participation are spread over a larger number of acres;

Unnecessary competition is reduced.

(See Lewis Mosburg www.mosburgoil gas.com/html/mosburg_3_7_99_3a.html)

Here are the elements of the AMI contract:

 Legal Parties –Authority by those executing the contract.

 Offer – If you acquire a lease in the designated area, we own an interest.

 Consideration – If we acquire an interest in the designated area, you own an interest.

 Acceptance –Contract must be in writing and execution constitutes acceptance.

Statute of Frauds – must be in writing as it impacts an interest in real property.

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