Bathurst Resources Ltd and another v L & M Coal Holdings Ltd

• Jurisdiction: New Zealand
• Judge: Winkelmann CJ,Ellen France J,Glazebrook,O'Regan,Williams JJ,O'Regan J
• Judgment Date: 14 July 2021
• Neutral Citation: [2021] NZSC 85
• Court: Supreme Court
• Docket Number: SC 29/2020

Between

Bathurst Resources Limited

First Appellant

Buller Coal Limited

Second Appellant

and

L & M Coal Holdings Limited

Respondent

[2021] NZSC 85

Court:

Winkelmann CJ, Glazebrook, O'Regan, Ellen France and Williams JJ

SC 29/2020

IN THE SUPREME COURT OF NEW ZEALAND

I TE KŌTI MANA NUI

Contract — appeal against a Court of Appeal decision which found in favour of the respondent in a dispute over the proper interpretation of a contract for the sale of coal mining rights — meaning of “shipped” — principles of contract interpretation — good faith — test for implication of terms in a contract — approach to the admissibility of extrinsic evidence

Counsel:

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

A R Galbraith QC, D R Kalderimis and N K Swan for Respondent

• A The appeal is allowed. The judgments of the High Court and Court of Appeal are set aside and judgment is entered for the appellants.

• B The application to adduce further evidence is dismissed.

• C The respondent must pay the appellants costs of $30,000 plus usual disbursements. We certify for second counsel.

• D Costs should be re-determined in the Courts below in light of this judgment.

JUDGMENT OF THE COURT

SUMMARY OF RESULT

(Given by the Court)

1 This appeal concerns the proper interpretation of a contract for the sale of coal mining rights. How to interpret the words of a written contract is a perennial issue in the law, and while over time the test to be applied to find the meaning of those words has become settled, the issue of what evidence outside the words of the contract should be allowed to assist with this task continues to be debated. So too the nature of the test for implication of terms in a contract.

2 All members of the Court have agreed on the approach to the admissibility of extrinsic evidence in cases of contractual interpretation. 1 The Court has also agreed on the test for the implication of terms. 2

3 The Court is unanimous on the interpretation of cl 3.4 of the contract between the parties. 3 Members of the Court have taken different views on the construction of cl 3.10 of the contract. The majority have found in favour of the appellants on this point, which is dispositive. 4 Accordingly, the appeal is allowed. The respondent must pay the appellants costs of $30,000 plus usual disbursements. Costs in the Courts below should be re-determined in light of this judgment. Winkelmann CJ and Ellen France J would have dismissed the appeal. 5

4 The reasons of the Court for this result are given in the separate opinions delivered by:

REASONS

Winkelmann CJ And Ellen France J

Table of Contents

	Para No.
Winkelmann CJ and Ellen France J	[5]
Glazebrook, O'Regan and Williams JJ	[232]

Introduction	[5]
Factual background	[11]
Summary of the parties' submissions	[31]
Evidence available to assist in contractual interpretation	[40]
Parties' submissions on the admissibility of extrinsic evidence	[50]
The approach to admissibility in New Zealand	[54]
Declarations of subjective intent	[67]
Prior negotiations	[69]
Specialised meanings	[81]
Subsequent conduct	[84]
Test for implication of terms: the same as interpretation?	[91]
Parties' submissions	[103]
Our approach to the test for implication of terms	[106]
Was the first performance payment under cl 3.4 triggered?	[119]
Parties' submissions	[121]
Bathurst	[121]
L&M	[129]
High Court decision	[131]
Court of Appeal decision	[132]
Our analysis	[134]
The text of the contract	[134]
Commercial purpose	[139]
Subsequent conduct	[149]
Evidence as to the meaning of the word “shipped”	[152]
Conclusion	[158]
The construction of cl 3.10	[159]
The relevant provisions	[165]
The approach in the Courts below	[167]
Overview of submissions	[170]
Our assessment	[174]
Discussion	[175]
An implied term?	[201]
Proper purposes	[224]
Good faith	[227]
Result	[230]

Introduction

5 The dispute between the parties to this appeal arises in the context of the sale of coal exploration permits over parts of the Denniston and Stockton Plateaus. These plateaus lie within the Buller Coalfield, which is an historic mining area in the South Island of New Zealand.

6 In June 2010, Bathurst Resources Ltd (Bathurst) agreed to purchase coal exploration rights and mining-related applications from L & M Coal Holdings Ltd (L&M). Two performance payments, each of USD 40 million, were agreed to be payable when 25,000 tonnes, and then one million tonnes, of coal had been “shipped from the Permit Areas”. Then, in 2012, Bathurst and L&M entered into a deed (the Third Deed) varying the original written Agreement for Sale and Purchase (the Agreement) to provide that payment of the first performance payment could be deferred at Bathurst's election while Bathurst continued to pay royalties under a related royalty deed.

7 After more than 25,000 tonnes of coal was mined and trucked out, Bathurst suspended mining and stopped paying royalties, apart from royalties on a small amount of stockpiled coal. It has yet to pay the first performance payment. Bathurst says that without mining, no royalties are due and so, since it is continuing to pay the royalties due under the royalty deed (which are none), it can continue to defer payment of the first performance payment.

8 Bathurst and L&M dispute the proper interpretation of the Agreement and the amending Third Deed. There are two core issues between them. The first is as to whether the first performance payment obligation has been triggered in terms of the Agreement, an issue which turns on the interpretation of the expression “shipped from the Permit Areas” in cl 3.4 of the Agreement. The second issue is whether, if the first performance payment obligation has been triggered, Bathurst is contractually entitled to continue to defer that payment when it is not paying any royalties.

9 In the High Court, in order to support their respective cases for a particular interpretation, the parties produced extensive evidence which was extrinsic to the written contractual documents. This included evidence of pre-contractual negotiations; of what the parties intended the agreements should mean; of surrounding circumstances, both before and after execution of the two documents, which are said to show the commercial purpose of the agreements; and evidence of the parties' post-execution conduct. The High Court 6 and Court of Appeal 7 each found in favour of L&M on the substantive issues, holding that the obligation to make the first performance payment had been triggered and could not be deferred when no royalties were being paid. However, they differed to some extent in their approach to the admissibility of the extrinsic evidence adduced by the parties.

10 The test for the admissibility of extrinsic evidence to assist with the task of contractual interpretation and for the implication of contractual terms are issues of general or public importance. 8 Leave was therefore granted to Bathurst to appeal to this Court. The grant of leave included the following indications to counsel to assist in their preparation for the appeal: 9

• (a) The Court would not revisit the principles of contractual interpretation that were set out by this Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd. 10

• (b) However, since Firm PI did not address the approach to be taken to the admissibility or otherwise of evidence of prior negotiations or subsequent conduct, 11 we would hear argument on these issues.

• (c) We would hear argument on the distinction between interpretation and implication and the appropriate test for the latter.

Factual background

11 Prior to 2010, L&M was the holder of two exploration permits on the Denniston and Stockton Plateaus. 12 An area known as Escarpment, on the Denniston

Plateau, was seen as the most attractive development project for coal extraction. That was because it contained significant volumes of high quality coking coal. The characteristics of coking coal are such that it can be used in the steel-making process. It is of higher value than thermal coal. Thermal coal is degraded coking coal which has lost its coking properties through the process of oxidisation. Thermal coal was also present at Escarpment, a natural by-product of the presence of coking coal

12 By 2008, L&M was seeking to either develop this coal resource with a partner, or to sell the development prospects to others. In 2009, Mr Geoff Loudon, a director of L&M's parent company, met with Mr Hamish Bohannan, then Chief Executive of Bathurst. Bathurst already had mining interests in the state of Kentucky in the United States and was seeking opportunities elsewhere. The parties discussed the potential sale, and in December 2009 Bathurst made a formal offer, with a conditional consideration of USD 110 million. In February 2010, a binding letter of intent was signed, and on 10 June 2010 the Agreement was executed. 13

13 The transaction was structured as a sale of all the shares in the company which held the assets — Buller Coal Ltd. 14 The assets included two exploration permits and the rights associated with them, and an outstanding application for a mining permit for Escarpment, which fell within the area of one of the exploration permits. 15 The mining permit for Escarpment was granted shortly after the Agreement was entered into, on 24 June 2010.

14 The payment for these rights included cash consideration, performance payments, performance shares and royalties payable under a royalty deed, the draft of which was attached as a schedule to the Agreement. 16 The Agreement provided for the payment of USD 120 million in instalments as follows:

• (a) A deposit...