Exploration option agreements need to be specific – by Julius Melnitzer (National Post -July 29, 2015)

The National Post is Canada’s second largest national paper.

Exploration option agreements negotiated by sophisticated parties mean what they say and nothing more, says the British Columbia Court of Appeal in a recent decision called American Creek Resources Ltd. v. Teuton Resources Corp.

That might sound simple — perhaps even obvious — But the American Creek decision has major implications for the way parties set up option agreements, a common way to fund exploration in the Canadian mining industry.

“The American Creek decision will definitely change industry practice for drafting the exploration agreements that are the lifeblood of the industry,” says Josh Lewis of Fasken Martineau DuMoulin LLP in Vancouver.

Typically, the company holding the property grants another company the option to earn an interest in the property by exploring it. The agreement usually prescribes the amount of the expenditures that must be made, but the description of those expenditures can vary from deal to deal.

American Creek sought to enforce its option to acquire a 51 per cent interest in certain mining claims that Teuton owned in northwestern B.C. American Creek demonstrated that it had spent the $5 million mandated by the exploration agreement. But Teuton refused to transfer the interest, arguing that the expenditures were unreasonable.

The appellate court ruled that absent a standard in the agreement itself, such as reasonableness, it would not impose a qualification on the expenses. American Creek’s only obligation was to make valid “exploration expenditures,” which it had done. Consequently, no inquiry into the reasonableness was necessary and Teuton was obliged to transfer the 51 per cent interest to American Creek.

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