Bathurst Resources Ltd v L&M Coal Holdings Ltd

• Jurisdiction: New Zealand
• Judge: Kós P
• Judgment Date: 24 April 2020
• Neutral Citation: [2020] NZCA 113
• Court: Court of Appeal
• Docket Number: CA483/2018
• Date: 24 April 2020

Between

Bathurst Resources Limited

First Appellant

Buller Coal Limited

Second Appellant

and

L&M Coal Holdings Limited

Respondent

[2020] NZCA 113

Court:

Kós P, Gilbert and Goddard JJ

CA483/2018

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Contract — interpretation of contact — coal mining agreement — performance payment obligations — interpretation of “shipped from the Permit Areas” in sale agreement — whether a term should be implied requiring the first appellant to undertake substantive continuing levels of production — summary of approach to interpretation of the contracts

Counsel:

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

A R Galbraith QC, D R Kaldermis and D P Neild for Respondent

• A The appeal is dismissed.

• B The appellants must pay the respondent costs for a complex appeal on a band B basis plus usual disbursements. We certify for second counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Kós P)

1 Bathurst acquired coal mining rights on the West Coast of New Zealand's South Island from L&M. Part of the purchase price was deferred. Two performance payments, each of US$40 million, were payable when 25,000 tonnes, and then one million tonnes, of coal had been shipped from the permit areas.

2 Although more than 50,000 tonnes of coal have now been mined by Bathurst from the permit areas, it says this does not trigger the first performance payment obligation. It says the coal has not been “shipped” from the permit areas.

3 Moreover, Bathurst has now mothballed the mining operation. It is focusing on mining opportunities elsewhere. It accepts liability to pay royalties to L&M on any coal mined and sold, although nothing now is being mined and little is being sold. But it denies any present liability for the first performance payment. It says cl 3.10 of the sale agreement enables it to postpone that payment so long as it pays royalties, at a higher 10 per cent rate, on the coal it sells.

4 L&M issued proceedings in December 2016. It sought a declaration that the first performance payment was due and owing, and an order that Bathurst pay US$40 million to L&M, together with interest and costs.

5 Dobson J held in favour of L&M. 1 Bathurst appeals.

Issues on appeal

6 Three issues arise on appeal:

• (a) What is the correct meaning of “shipped from the Permit Areas” in cl 3.4 of the sale agreement?

• (b) What is the true effect of cl 3.10 of the same agreement?

• (c) Should a term be implied requiring Bathurst to undertake substantive continuing levels of production?

Background

7 L&M is a company incorporated under Belize law. Its principal business office is in Hong Kong. It is effectively governed by its founder, Mr Geoff Loudon, a New Zealand-based geologist and investor in mineral resources. Bathurst is

a company incorporated under New Zealand law. Its registered office is in Wellington. It has interests in the mining of natural resources, including coal. It is listed on the Australian stock exchange. Between September 2010 and July 2015 it was listed also on the New Zealand exchange

8 Between 2003 and 2009, L&M acquired two coal exploration permits on the Denniston and Stockton Plateaus. They covered about 22,000 hectares. Coal mining had been conducted on these plateaus since the late 19th century. From 1960 permits to explore and mine resources in the area were held by the Crown's State Coal Mines, and subsequently the state-owned enterprise, Solid Energy. These permits were relinquished by Solid Energy at the end of the 20th century.

9 The Escarpment Mine on the Denniston Plateau was “seen as the most attractive development project, with the prospect of progressing to mine in the Deep Creek area relatively nearby” at a later stage. 2 It was anticipated mining would be undertaken by open cast techniques. Open cast mining involves stripping away overburden to reveal seams of coal, extracting that coal, and then reinstating the area by reforming the mining area using the displaced overburden.

10 In 2008 L&M sought to sell these exploration permits, along with an extant application for a mining permit on one of the blocks. In August 2009, Bathurst expressed interest. In December 2009 Bathurst made a formal offer, at a conditional consideration of US$110 million. In February 2010 a binding letter of intent was executed. At the time the market for coal was buoyant. The letter of intent was negotiated by Mr Loudon for L&M, and Mr Hamish Bohannan, the then-CEO of Bathurst.

11 The transaction was structured as a sale of all shares in an L&M subsidiary, L&M Coal Ltd, which owned the relevant permits and rights to the application. 3

12 The principal contract in issue, the sale agreement, was executed in June 2010. Those provisions particularly relevant are set out in the following section of this judgment. But they were summarised by Dobson J in these terms: 4

• • 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 [sale agreement] 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.

13 As the Judge observed, between settlement of the sale agreement in November 2010 and mid to late 2016, a “constructive and co-operative relationship between the parties” existed. 5 L&M did not strictly enforce its contract rights. It gave assistance to Bathurst to enable it to perform its remaining contractual obligations.

14 In August 2012 the parties entered into a deed of amendment addressing what would happen if Bathurst failed to pay the performance payments when due. 6 It was in fact the third such deed since execution of the sale agreement. The critical

provision, relevant to the second issue we address in this judgment, is cl 3.10. It is set out at [30] below. In short it provided that failure to make a performance payment was “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”. 7

15 Challenges to resource consents caused significant delays to the extraction of coal from the permit areas. Those consents were eventually granted in June 2014. Coal was extracted from the Escarpment Mine between September 2014 and March 2016. By September 2015, some 25,000 tonnes of coal had been extracted. L&M say at this point the obligation to pay the first performance payment was triggered. By March 2016 a total of some 50,000 tonnes had been extracted.

16 In that month, March 2016, Bathurst announced it was suspending mining operations at the Escarpment Mine. That mine would be placed in “care and maintenance”. Thereafter Bathurst ceased paying royalties, except for small amounts payable for sales of stockpiled coal.

17 In September 2016, Bathurst acquired a majority interest in a joint venture which then purchased other coal mining interests at Rotowaro and Maramarua, in the North Island, and the open cast mine at Stockton on the West Coast of the South Island, from Solid Energy. Bathurst wishes to exploit those resources before resuming mining at the Escarpment Mine or other prospects within the permit areas acquired from L&M.

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

The contracts

19 Negotiations began in August 2009 between Bathurst's Mr Bohannan, and L&M's Mr Loudon. A confidentiality agreement was entered. In December 2009 Bathurst issued a letter of offer.

Further information was exchanged between the parties, and negotiations continued. On 23 February 2010 the parties signed a binding letter of intent. It was in effect an heads of agreement.

The sale agreement

20 The sale agreement was executed on 10 June 2010. It provided a transfer to Bathurst of all shares owned by L&M in its subsidiary L&M Coal Ltd. That subsidiary company held the relevant exploration permits, and the mining permit application.

21 Clause 3.1 of the sale agreement provided that the aggregate consideration payable for the shares comprised the deposit, settlement cash consideration, performance payments, performance shares and the royalty payable by L&M Coal Ltd to L&M under a royalty deed (to be entered in the form set out in sch 2 of the agreement):

• (a) The deposit was US$5 million, and was to be paid within 20 days of execution. It was...