L&M Coal Holdings Ltd v Bathurst Resources Ltd

• Jurisdiction: New Zealand
• Judge: Dobson J
• Judgment Date: 17 August 2018
• Neutral Citation: [2018] NZHC 2127
• Docket Number: CIV-2016-485-1007
• Court: High Court
• Date: 17 August 2018

Between

L&M Coal Holdings Limited

Plaintiff

and

Bathurst Resources Limited

First Defendant

Buller Coal Limited

Second Defendant

[2018] NZHC 2127

CIV-2016-485-1007

IN THE HIGH COURT OF NEW ZEALAND

WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA

TE WHANGANUI-Ā-TARA ROHE

Contract — application for a declaration that a performance payment had become due and owing — performance payments due under a contract for the sale of permits to explore for and mine coal — mining operations suspended — coal sold on the domestic market — whether coal had been “shipped” triggering the performance payment clause — test for implying a term — whether the Court should constrain a contractual discretion

Counsel:

A R Galbraith QC and D R Kalderimis for plaintiff

J E Hodder QC, R J Gordon and D P MacKenzie for defendants

Contents

Introduction	[1]
Background to the dispute	[5]
Outline of the issues	[21]
The development of the assets	[22]
Relevant contractual provisions	[28]
Scope of the evidence	[31]
Objections to evidence as to contractual intentions	[36]
The nature of the contract	[41]
Issue one: Meaning of “shipped” in clause 3.4 of the ASP	[58]
Contractual context	[65]
Subsequent conduct	[85]
Other usage by the parties	[95]
Dictionary definitions	[98]
Case law	[104]
Expert evidence on usage	[108]
Construction coal excluded	[110]
Issue two: Interpretation of clause 3.10	[114]
Did clause 3.10 alter the prior contractual position?	[115]
Nature of Bathurst's alternative payment obligation	[130]
2013 clarification	[148]
Issue three: Implied term in clause 3.10	[156]
Issue four: Use of contractual discretion for other than a proper purpose	[191]
Issue five: Did Bathurst use clause 3.10 for a proper purpose?	[212]
Outcome	[226]
Costs	[228]

RESERVED JUDGMENT OF Dobson J

Introduction

1 This proceeding involves a dispute between the parties over performance of a contract for the sale of permits to explore for and mine coal on the Denniston Plateau on the west coast of the South Island (the permit areas).

2 The plaintiff (L&M) is a company incorporated under the laws of Belize and has its business office in Hong Kong. 1

3 The first defendant (Bathurst) is a company registered under the laws of New Zealand and has its registered office in Wellington. It is in the business of mining natural resources, including coal. At relevant times, Bathurst was a company listed both on the ASX and NZX. 2

4 The present transaction was structured as a sale of all the shares in the second defendant, L&M Coal Limited, which was an L&M subsidiary that owned the assets that were the subject of the transaction. L&M Coal Limited subsequently changed its name to Buller Coal Limited.

Background to the dispute

5 The relevant contract (the ASP) was executed in June 2010. Its provisions relevantly included:

• • Payment of a non-refundable deposit of US$5 million, and consideration of US$35 million to be paid on settlement, which occurred in November 2010.

• • Two further performance payments of US$40 million each would become due on defined volumes of coal being shipped from the permit areas. The first performance payment was due when Bathurst had shipped 25,000 tonnes of coal, and the second payment when one million tonnes of coal had been shipped.

• • When the second performance payment was due, or if Bathurst received notice of an offer to acquire more than 50 per cent of its shares (or notice of a transaction having substantially the same effect), Bathurst was obliged to issue fully paid ordinary shares representing five per cent of the then current post-issue share capital of Bathurst.

• • In addition to that sequence of payments, Bathurst was obliged to pay royalties on amounts received for sales of coal. The detailed royalties provisions were recorded in a separate deed of royalty, a draft of which was annexed to the ASP and which was separately completed in August 2010 (the royalty deed). The initial royalty rate was 10 per cent of gross sales revenue of coal, but after the first performance payment was made the rate would drop to five per cent until the second performance payment was made, and thereafter would be 1.75 per cent.

• • If Bathurst was constrained by regulatory requirements, or for any other reason, from issuing shares to L&M when the second performance measure was achieved, then in lieu of the issue of those shares the relevant royalty rate in the royalty deed would increase by two per cent.

6 For much of the period between completion of the ASP in 2010 and mid to late 2016, the evidence suggests a constructive and co-operative relationship between the parties. L&M demonstrated flexibility in not strictly enforcing its contractual terms, and provided assistance to Bathurst to enable it to perform the remaining contractual obligations.

7 It was apparent that Bathurst's ability to raise sufficient funds to make the performance payments would depend on it demonstrating the viability of coal production from the permit areas.

8 In August 2012, the parties entered into a deed of amendment (the third amendment) that addressed the consequences of Bathurst not paying the performance payments when they became due. The operative part of the third amendment inserted cl 3.10 into the ASP, which provided:

For the avoidance of doubt, the parties acknowledge and agree that a failure by the Purchaser to make, when and as due, a Performance Payment is not an actionable breach of or default under this Agreement for so long as the relevant royalty payments continue to be made under the Royalty Deed.

9 Recovery of coal from the Escarpment Mine within the permit areas was delayed much longer than the parties anticipated at the time of the ASP by challenges to the resource consents that were eventually granted for the mining operation. Extraction of coal occurred between September 2014 and approximately March 2016. Between early 2015 and March 2016, approximately 50,000 tonnes were extracted, but Bathurst has not paid the first performance payment of US$40 million. 3

10 In March 2016, Bathurst announced that it was to suspend mining operations at the Escarpment Mine, and placed the mine into “care and maintenance”. As a result, Bathurst has ceased paying royalties, except for modest amounts payable from small sales of coal from a stockpile.

11 Bathurst has subsequently acquired a majority interest in another mining venture (BT Mining) that purchased a number of coal mining interests from Solid Energy in a contract entered into in October 2016. That contract was settled in August 2017 and relates to the North Island coal mines at Rotowaro and Maramarua, as well as the existing open-cast mine at Stockton on the west coast.

12 Bathurst's business plans for its west coast mining interests contemplate the ex-Solid Energy resources being exploited before the resumption of mining at Escarpment or other prospects within the permit areas acquired from L&M. That sequence has been decided upon despite the ex-Solid Energy areas not having all necessary regulatory consents.

13 L&M commenced this proceeding in December 2016. It seeks a declaration that the first performance payment has become due and owing, and an order that Bathurst pay US$40 million to L&M, together with interest and costs.

14 L&M's case is that from some point in 2014, Bathurst's board decided on a change of strategy. Instead of working to establish the feasibility of mining operations within the permit areas and raising the capital to make the performance payments required under the ASP, Bathurst would instead deny that any further obligations were owed under the ASP and pursue a course of action intended to support that denial on legal and factual grounds as managed by Bathurst.

15 Bathurst's first response to the claim is that the first performance payment is not due because coal produced from the Escarpment Mine has been sold for domestic use (principally to Holcim, a west coast producer of cement). Bathurst contends that this coal has not been “shipped” because it has not involved carriage by sea, so arguably does not count in quantifying relevant production.

16 Bathurst says that the essential focus of the coal mining prospects that were the subject of the ASP was the extraction of high quality hard coking coal, the only market for which is in metallurgical use overseas. It treats the presence within the permit areas of quantities of lower grades of coal, for which there may be a domestic market for thermal purposes, as merely incidental or fortuitous. Arguably, the parties were focused on the export prospects, in which event “shipped” would inevitably involve carriage by sea.

17 In addition to disputing Bathurst's narrower interpretation of when coal is “shipped” from the permit area, L&M argues that Bathurst cannot rely on cl 3.10 to defer paying the first performance payment when it is not paying the royalties that it says the parties contemplated would compensate L&M for the delay in receiving the first performance payment. L&M submits that this limitation on Bathurst's entitlement to rely on cl 3.10 arises either as a matter of interpretation or, if necessary, by the implication of a term to that effect.

18 Bathurst's response is to argue that cl 3.10 affords it an option which it is lawfully exercising, namely Bathurst stands ready to pay all royalties that become payable in terms of the royalty deed, but that amount is practically zero because of the absence of mining activity. The ASP, including cl 3.10, contemplates that contingency and there is no actionable default.

19 If L&M is unsuccessful in limiting Bathurst's resort to cl 3.10 because Bathurst's argument in the...