L&M Coal Holdings Ltd v Bathurst Resources Ltd

JurisdictionNew Zealand
CourtHigh Court
JudgeDobson J
Judgment Date17 Aug 2018
Neutral Citation[2018] NZHC 2127
Docket NumberCIV-2016-485-1007

[2018] NZHC 2127

IN THE HIGH COURT OF NEW ZEALAND

WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA

TE WHANGANUI-Ā-TARA ROHE

CIV-2016-485-1007

Between
L&M Coal Holdings Limited
Plaintiff
and
Bathurst Resources Limited
First Defendant
Buller Coal Limited
Second Defendant
Counsel:

A R Galbraith QC and D R Kalderimis for plaintiff

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

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

The Court held that the word “shipped” was used in a wide range of contexts. The context here was the transport of a bulk cargo from a land-locked area on the west coast of the South Island. Coal could never be “shipped” in the narrow sense from the boundaries of the permit areas. “Shipped” in the agreement meant “transported”.

Clause 3.10 recorded a mutual expectation operating that non-payment would not be relied on as a default. Bathurst could not rely on cl 3.10 if it was also not paying royalties. Bathurst's obligations to pay the performance payments and on-going royalties were conditional on the timing and level of production within the permit areas.

The Court referred to the five conditions in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 as to whether the term should be implied. The parties shared the risk that economic extraction of coal from the permit areas might not occur. Therefore, it would not be reasonable and equitable to limit Bathurst's resort to cl 3.10 to circumstances where substantial royalties were being paid if Bathurst was not producing coal from the permit areas. The obligation to pay was referred to implicitly because it was relevant. The implied term would have been obvious to a notional reasonable person in the circumstances. The concept being described permitted flexibility in the rate of production without being inadequately clear. The entire agreement clause did not operate to exclude the implication of a term in cl 3.10. The addition of an implied term limiting the circumstances in which Bathurst could rely on cl 3.10 to deny that it was in default on its obligation to make the performance payment did not contradict any other contractual term. The conditions from BP Refinery were made out.

Bathurst's ability to cease mining and to rely on cl 3.10 to deny that non-payment of the performance payment placed it in default did not involve a discretionary decision whether to continue paying royalties at the higher rate or instead to make the performance payment. Rather, it involved asserting a contractual power.

L&M was entitled to a declaration that the first performance payment had become due and owing by Bathurst, and an order that Bathurst pay US$40 million to L&M.

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...

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