Australian Zircon NL v Austpac Resources NL [No 2]
[2011] WASC 186 (S)
•4 AUGUST 2011
AUSTRALIAN ZIRCON NL -v- AUSTPAC RESOURCES NL [No 2] [2011] WASC 186 (S)
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2011] WASC 186 (S) | |
| Case No: | CIV:1600/2010 | 13 & 14 DECEMBER 2010, 4, 15 & 29 AUGUST 2011 AND ON THE PAPERS | |
| Coram: | CORBOY J | 4/08/11 | |
| 10/01/12 | |||
| 14 | Judgment Part: | 1 of 1 | |
| Result: | Second and third defendants ordered to pay costs of counterclaim by first defendants | ||
| B | |||
| PDF Version |
| Parties: | AUSTRALIAN ZIRCON NL AUSTPAC RESOURCES NL ASTRON LIMITED WIM 150 PTY LTD |
Catchwords: | Practice and procedure Costs Whether right to an indemnity accrued prior to termination of agreement for frustration Whether costs should follow the event |
Legislation: | Frustrated Contracts Act 1978 (NSW), s 7 |
Case References: | Australian Zircon NL v Austpac Resources NL [No 2] [2011] WASC 186 Baltic Shipping Co v Dillon (1993) 176 CLR 344 Fibrosa Spolka Akcynja v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 Gomba Holdings UK Ltd v Minories Finance Ltd (No 2) [1992] 4 All ER 588 Rayner v Australia and New Zealand Banking Group Ltd [2003] WASCA 264 Rumball v Mortimore [2000] WASC 126 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
DECISION : 10 JANUARY 2012 FILE NO/S : CIV 1600 of 2010 BETWEEN : AUSTRALIAN ZIRCON NL
- Plaintiff
AND
AUSTPAC RESOURCES NL
First Defendant
ASTRON LIMITED
Second Defendant
WIM 150 PTY LTD
Third Defendant
(BY ORIGINAL ACTION)
AUSTPAC RESOURCES NL
Plaintiff
AND
AUSTRALIAN ZIRCON NL
First Defendant
ASTRON LIMITED
Second Defendant
WIM 150 PTY LTD
Third Defendant
(BY COUNTERCLAIM)
Catchwords:
Practice and procedure - Costs - Whether right to an indemnity accrued prior to termination of agreement for frustration - Whether costs should follow the event
Legislation:
Frustrated Contracts Act 1978 (NSW), s 7
Result:
Second and third defendants ordered to pay costs of counterclaim by first defendants
Category: B
(Page 3)
Representation:
Original Action
Counsel:
Plaintiff : Mr B Dharmananda & Ms K M McNally
First Defendant : Mr M D Howard SC & Mr S J Davis
Second Defendant : Mr I R Freeman
Third Defendant : Mr I R Freeman
Solicitors:
Plaintiff : Clayton Utz
First Defendant : Gadens Lawyers
Second Defendant : Lavan Legal
Third Defendant : Lavan Legal
Counterclaim
Counsel:
Plaintiff : Mr M D Howard SC & Mr S J Davis
First Defendant : Mr B Dharmananda & Ms K M McNally
Second Defendant : Mr I R Freeman
Third Defendant : Mr I R Freeman
Solicitors:
Plaintiff : Gadens Lawyers
First Defendant : Clayton Utz
Second Defendant : Lavan Legal
Third Defendant : Lavan Legal
Case(s) referred to in judgment(s):
Australian Zircon NL v Austpac Resources NL [No 2] [2011] WASC 186
Baltic Shipping Co v Dillon (1993) 176 CLR 344
Fibrosa Spolka Akcynja v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32
Gomba Holdings UK Ltd v Minories Finance Ltd (No 2) [1992] 4 All ER 588
(Page 4)
Rayner v Australia and New Zealand Banking Group Ltd [2003] WASCA 264
Rumball v Mortimore [2000] WASC 126
(Page 5)
- CORBOY J:
The application and the result
1 In this action:
(a) Australian Zircon NL claimed a declaration that an agreement made between Austpac Resources NL and Astron Ltd by which Austpac agreed to sell and transfer an exploration licence and its interest in a farm-in agreement to Astron (the Sale Agreement) was ineffective to transfer the licence and farm-in interest. (The exploration licence and interest in the farm-in agreement were purportedly further assigned by Astron to its wholly owned subsidiary, WIM 150 Pty Ltd.)
(b) Austpac counterclaimed for a declaration that Australian Zircon held its interest in the farm-in agreement on trust for Astron and/or WIM 150 if it was found that the Sale Agreement was ineffective to transfer the interest.
(c) Austpac also claimed a declaration as against Astron and WIM 150 that the Sale Agreement was discharged by frustration if it was found that the agreement was ineffective to transfer the licence and the farm-in interest and Australian Zircon did not hold the interest on trust for Astron and/or WIM 150.
2 A declaration was made that the Sale Agreement was ineffective to transfer or assign or create a trust over Austpac's rights and obligations in the farm-in agreement without the consent of Australian Zircon. It was further declared that any assignment from Astron to WIM 150 was ineffective to the extent that it purported to transfer rights and obligations under the farm-in agreement and that the Sale Agreement was frustrated on 3 May 2010 and was terminated on that date. The reasons for those declarations appear in Australian Zircon NL v Austpac Resources NL [No 2] [2011] WASC 186.
3 It was further ordered that Austpac, Astron and WIM 150 pay Australian Zircon's costs of the action and that Austpac pay Australian Zircon's costs of Austpac's counterclaim to the extent that such costs were in addition to costs reasonably incurred by Australian Zircon in its action. No order was made for the costs of Austpac's claim for a declaration that the Sale Agreement had been discharged by frustration nor was any other order made regarding costs as between the defendants. Rather, the defendants were directed to file submissions on the further cost orders that
(Page 6)
- they considered should be made as between them. These reasons concern those submissions.
4 Schedule 1 to the Sale Agreement contained warranties given by Austpac. By cl 4.1 of sch 1, Austpac gave a warranty that it was entitled to sell and transfer the 'full legal and beneficial ownership of the Assets' to Astron on the terms set out in the agreement (the Warranty). The word 'Assets' was defined by cl 21.1 of the agreement to mean all of Austpac's interests, right and title to the 'Contracts'. The term 'Contracts' was defined to mean, in effect, those contracts described in sch 2 to the agreement. The only contract referred to in sch 2 was the farm-in agreement.
5 Clause 12.1 of the Sale Agreement provided that:
[Austpac] represents, warrants and undertakes to [Astron] that as at the date of this agreement, and continuously from the date of this agreement to and as at Completion, each of the Warranties is true and accurate.
6 Clause 12.4 of the Sale Agreement further provided that:
Except to the extent that [Austpac's] liabilities expressly limited by this agreement, [Austpac] indemnifies [Astron] against all damages, losses, liabilities and expenses incurred by [Astron] as a consequence of any matter or thing being found to be in breach of any of the Warranties.
7 The Warranty formed one of the various warranties referred to in cl 12.1 and cl 12.4 of the Sale Agreement. Astron and WIM 150 contend that the cost orders made between the defendants should give effect to the warranty and indemnity provisions contained in the Sale Agreement notwithstanding that the agreement was declared to be frustrated and at an end as at 3 May 2010 (that is, a few days after proceedings were commenced by Australian Zircon). They seek an order that Austpac indemnify them for any costs payable to Australian Zircon. They also submit that no order should be made for the costs of Austpac's counterclaim for a declaration that the Sale Agreement was frustrated.
8 Austpac disputes that Astron and WIM 150 are entitled to be indemnified under the Sale Agreement. Alternatively, it contends that the court is not in a position to determine whether Astron and WIM 150 are entitled to be indemnified as that issue and related questions were not litigated in the trial. It submits that the only additional order that should be made is that Astron and WIM 150 should be directed to pay the costs of the counterclaim for a declaration that the Sale Agreement was frustrated and at an end.
(Page 7)
9 I have concluded that Astron and WIM 150 are not entitled to be indemnified under the Sale Agreement for the costs of the proceedings; that Astron and WIM 150 should pay the costs of Austpac's counterclaim and that no further order should be made to adjust the costs of the action as between the defendants.
The submissions made by Astron/WIM 150
10 Astron/WIM 150 submitted that:
(a) Rights that have accrued under an agreement are not divested on the agreement being discharged for frustration (second and third defendants' submissions on costs, par 5).
(b) Astron and WIM 150 took a limited role in the proceedings, including in the counterclaims made by Austpac. At trial (on the second day) they conceded that Austpac was entitled to a declaration that the Sale Agreement was frustrated if Australian Zircon succeeded in its claims against Austpac (par 9).
(c) Australian Zircon's complaint concerned the conduct of Austpac in purporting to assign the exploration licence and its interest in the farm-in agreement without obtaining Australian Zircon's consent. That was a breach of the farm-in agreement. Astron and WIM 150 were 'in large part joined as necessary parties to the proceeding given the nature of the relief that [Australian Zircon] sought' (par 10).
(d) Section 37(1) of the Supreme Court Act 1936 (WA) and O 66 of the Rules of the Supreme Court1971 (WA) (RSC) confer a broad discretion on the court to make orders for the costs of and incidental to proceedings. However, where the parties to an action are also parties to a contract that contains plain and unambiguous provisions allowing for costs to be paid on a certain basis, the court will ordinarily exercise its discretion in a manner that is consistent with the terms of the contract: Rumball v Mortimore [2000] WASC 126 [15] (Owen J) (pars 11 and 12).
(e) Consistent with that principle, where a mortgage provides that a mortgagee is entitled to the costs of proceedings to enforce its rights under the mortgage, the mortgagee is not to be deprived of a contractual or equitable right to add costs to the security merely by reason of an order for payment of costs made without reference to the mortgagee's contractual or equitable rights and without any
- adjudication as to whether or not the mortgagee should be deprived of those costs: Rayner v Australia and New Zealand Banking Group Ltd [2003] WASCA 264 [23] (Murray & Parker JJ citing with approval, Gomba Holdings UK Ltd v Minories Finance Ltd (No 2) [1992] 4 All ER 588, 607 (Scott LJ)) (second and third defendants' submissions, par 15).
- (f) By parity of reasoning, the court ought to 'consider the terms of the bargain between the First and Second Defendants in the Sale Agreement' and exercise its discretion to make the costs orders sought by Astron and WIM 150. Austpac warranted that it was entitled to transfer the Assets but it was found that it was not entitled to do so without Australian Zircon's consent. Consequently, it breached the warranty, as a result of which a loss was suffered for which Austpac agreed it would indemnify Astron (pars 16 and 17).
Austpac's submissions
11 Austpac submitted that:
(a) The observations of Owen J in Rumball did not apply. The Sale Agreement did not contain plain and unambiguous provisions allowing for costs to be paid on a certain basis; it made no reference to legal costs and provided no basis for the payment of such costs (first defendant's submissions on costs, pars 6, 7 and 9).
(b) Cases such as Rumballand Rayner concerned agreements for the payment of costs incurred by a security holder in enforcing its security. That was 'a wholly different context' to the indemnity contained in the Sale Agreement. There was a 'real question' as to whether the principles identified in Rumball and Rayner applied in different (that is, non-security) contexts (par 8).
(c) A number of issues arose concerning the meaning and effect of the warranty and indemnity provisions in the Sale Agreement. The court could not determine whether Astron was entitled to be indemnified for costs pursuant to the Sale Agreement without deciding those issues. However, the issues were not raised for determination in the trial (pars 10 and 11).
(d) There was a further and related question as to whether Astron had a right to be indemnified under the Sale Agreement that had accrued prior to the frustrating event. Any right that Astron might
- have possessed to be indemnified had not accrued by that time (pars 13 to 17).
- (e) The Sale Agreement was governed by the law of New South Wales and accordingly, the Frustrated Contracts Act 1978 (NSW) applied. However, the provisions of that Act did not assist Astron and WIM 150 to establish a right to be indemnified under the Sale Agreement. Further, there were issues relevant to the application of that Act that ought to have been raised for determination at trial. Those issues cannot now be determined.
Some preliminary comments
12 In my view, the principles referred to in the submissions made by Astron and WIM 150 are not confined to agreements for the payment of costs contained in security contracts. The court retains a discretion over costs notwithstanding any pre-litigation contract made between the parties to proceedings. That discretion is to be exercised judicially. It is plainly just that the court should have regard to any agreement between the parties that affects an order for costs - and indeed, to give effect to that agreement unless other discretionary considerations indicate that this would produce an unjust result. There is no reason why the comments of Owen J in Rumball and the Full Court in Rayner should be confined to provisions concerning costs found in security contracts. Similarly, the principles identified by Owen J and the Full Court are not limited to instances where the relevant instrument expressly refers to the payment of legal costs in 'plain and unambiguous language'.
13 However, there is an obvious difference between a pre-litigation contract that provides for which party to the contract should bear the costs of any proceedings between the parties and an indemnity of the kind contained in the Sale Agreement. An indemnity does not bear directly on the question of which party is to be held liable for the costs of any proceedings; it merely provides that party A is to be indemnified by party B for any costs that party A is ordered to pay. The indemnity is a contract that operates independently of the court's costs orders. That, I think, was the point that is sought to be made by Austpac in its submissions. The first order sought by Astron and WIM 150 seeks to enforce a contractual indemnity under the guise of inviting the court to exercise its discretion on costs in a particular way. The court cannot make the order sought, so it is submitted, as the enforceability of the indemnity was never an issue raised in the trial.
(Page 10)
14 I accept that the principles identified by Owen J in Rumball and the Full Court in Rayner do not directly apply. The principles concern how the court should exercise its discretion to order costs having regard to the terms of an agreement between the parties relating to that question. The first order sought by Astron and WIM 150 is not an order concerning the court's exercise of a discretion to award costs; it is, in substance, an order to specifically enforce a term of the Sale Agreement. Whether that term could be enforced by Astron was not an issue that was raised for determination in the trial.
15 However, in my view, the fact that the Warranty and indemnity were given by Austpac may still be relevant to the exercise of court's discretion to award costs. The terms of a pre-litigation contract may be relevant to the way in which the court should exercise its discretion on costs even if the contract does not specifically make provision for which party should bear the costs of any proceedings involving the contract. It would, in my view, be fair as between the parties to consider whether Astron and WIM 150 were, as they submit, merely joined as necessary parties to what was otherwise a breach of the farm-in agreement by Austpac in circumstances where Austpac had given the Warranty and promised, in effect, to bear the consequences of any breach of the Warranty.
The effect of termination of the Sale Agreement
16 At common law, a frustrating event terminates the contract. The termination operates from the time of frustration; the contract is not invalid from inception so that rights that had accrued at the time of frustration remain enforceable.
17 Astron and WIM 150 contend that the right to be indemnified under the Sale Agreement for the costs of Austpac's claim had accrued by the time that the agreement was frustrated. They did not identify when and how the right accrued before that time but presumably, it is contended that Austpac breached the warranty that it gave on making the Sale Agreement.
18 The terms of the indemnity contained in the Sale Agreement (cl 12.4) were reproduced earlier in the reasons. The wording of the clause is unusual. The liability to indemnify does not arise directly from a breach of warranty but rather, 'as a consequence of any matter or thing being found to be in breach' of a warranty given by Austpac. Accordingly, Austpac's liability to indemnify was contingent on three conditions being fulfilled:
(Page 11)
- (a) a breach of a warranty by Austpac;
(b) Astron suffering damage or loss or incurring a liability or expense;
(c) a finding being made that Astron had suffered damage or loss or incurred a liability or expense as a consequence of the breach of warranty.
19 The Sale Agreement does not specify how or by whom the finding referred to in cl 12.4 was to be made. The word 'found' is seemingly ambiguous - does it refer to the parties discovering that there has been a breach of warranty through, for example, the occurrence of a particular event or does it refer to a finding to that effect made by a third party such as a court?
20 In my view, Astron did not have a right to be indemnified under the Sale Agreement for any costs that it might incur or for which it might become liable in these proceedings that had accrued by the time that the Sale Agreement was terminated. That is because, at most, only the first of the three conditions required for Astron to have acquired the right had been satisfied (Austpac denies that even the first condition had been met):
(a) The expense or liability had not been incurred prior to termination of the Sale Agreement for frustration - consequently, a right to be indemnified could not have accrued in respect of those expenses or liabilities.
(b) There was no finding - and there could be no finding - by the time that the event frustrating the Sale Agreement occurred that costs incurred by Astron in these proceedings or any liability for costs was a consequence of Austpac's breach of the prohibition on assignment contained in the farm-in agreement (the 'matter or thing' that was alleged by Astron to be in breach of the warranties given by Austpac). That is because the costs had not been incurred by the time of the frustrating event.
(c) There was no 'finding' about whether a breach of the Warranty had occurred prior to termination of the Sale Agreement. The word 'found' connotes awareness - a conscious appreciation - that the 'matter or thing' was a breach of a warranty on whatever meaning is attributed to the word for the purpose of cl 12.4. The sale and transfer of the Assets under the Sale Agreement had not been found to be contrary to the farm-in agreement by anybody, including the defendants, by 3 May 2010. At most, there was at
- that time an assertion by Australian Zircon that the Sale Agreement had been made in breach of the farm-in agreement.
21 That conclusion is not affected by the provisions of the Frustrated Contracts Act. That Act is primarily directed to overcoming the perceived injustice of the common law position prior to the decision of the House of Lords in Fibrosa Spolka Akcynja v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 and see Baltic Shipping Co v Dillon (1993) 176 CLR 344. Section 7 of the Act provides that where a promise under a frustrated contract was due to be, but was not, performed before the time of frustration, the promise is discharged except to the extent necessary to support a claim for damages for breach of the promise before the time of frustration. That section does not assist Astron and WIM 150 as, in my view, any promise to indemnify made by Austpac in the Sale Agreement was not due to be performed before the time that the agreement was frustrated.
The costs of Austpac's counterclaim
22 Austpac alleged by par 13 of its counterclaim against Astron and WIM 150 that the Sale Agreement was premised on:
(a) Austpac being able to assign its rights and obligations, alternatively its rights under the farm-in agreement to Astron and/or any related party; or
(b) Austpac holding and performing the farm-in agreement as trustee for Astron.
23 Austpac further alleged that the farm-in agreement could only be performed on its terms if one of those matters occurred and accordingly, it claimed a declaration to the effect that the Sale Agreement was frustrated and at an end if both of those events could not occur.
24 In their defence to Austpac's claim, Astron and WIM 150:
(a) repeated allegations to the effect that on a proper construction of the farm-in agreement, Austpac's interest in the agreement was capable of being assigned without Australian Zircon's prior consent;
(b) alleged that the farm-in agreement did not constitute a bar to the performance of the Sale Agreement.
(Page 13)
25 I profess that I do not understand what was meant by that second plea if it was intended to allege some matter other than that the farm-in agreement did not prevent an assignment of Austpac's interest in the agreement to Astron and WIM 150. The plea was not the subject of any written submission made by Astron and/or WIM 150 prior to the commencement of the trial - indeed, the pre-trial submissions of Astron/WIM 150 made no reference to Austpac's claim for declaratory relief. However, the court was advised at the completion of Australian Zircon's case at trial that Astron and WIM 150 accepted that the Sale Agreement was frustrated and at an end if Australian Zircon succeeded in its claims for declarations (ts 136).
26 I have already expressed the view that it would be relevant to the question of costs if Astron and WIM 150 had established that Austpac had breached the Warranty notwithstanding the finding that the agreement was frustrated. It might then be open to conclude on that finding that Austpac and Astron had further agreed that Astron would be protected from any loss suffered or liability incurred as a consequence of the breach. Although in the particular circumstances that had arisen Astron could not enforce the indemnity given by Austpac in the Sale Agreement, the parties' intentions as expressed in the agreement would still be relevant to who should bear the costs of the proceedings. That approach would be, in my view, consistent with the spirit of the principle recognised by Owen J in Rumball.
27 The question of whether Austpac breached the Warranty was not raised for determination in the proceedings. It might be thought that a finding of breach could nevertheless be made having regard to the declarations made on the effect of the Sale Agreement and in particular, the finding that the agreement prohibited a transfer of Austpac's interest in the farm-in agreement without Australian Zircon's consent. However, Austpac denies that there was a breach of warranty. Its denial was based on the following propositions:
(a) Clause 12.2 of the Sale Agreement provided that each of the warranties given by Austpac were subject to 'any matter to the extent that it is accurately and fairly disclosed in the Disclosure Documents'.
(b) The expression 'Disclosure Documents' was defined to mean the documents listed in sch 3 to the agreement. The documents referred to in sch 3 included the farm-in agreement.
(Page 14)
- (c) The finding that was made on Australian Zircon's claims was that the farm-in agreement prohibited the transfer of Austpac's interest in that agreement without Australian Zircon's consent.
(d) That prohibition was contained within and, therefore, disclosed by the farm-in agreement.
28 The issue that immediately arises on those propositions is whether it could be said that the prohibition that was found to be contained in the farm-in agreement was 'accurately and fairly' disclosed merely by the provision of the farm-in agreement to Astron. That issue was not raised at trial and no finding can now be fairly made about the issue on the evidence adduced at trial.
29 In my view, it is not possible for Astron to now contend that Austpac breached the Warranty and that costs should be assessed on the basis that as between Austpac and Astron it was agreed that Austpac should bear the consequences of that breach. It follows that the ordinary rule that costs follow the event should apply - the event being that Austpac succeeded in obtaining declaratory relief in circumstances where its entitlement to that relief was formerly denied on the pleadings by Astron and WIM 150. Austpac was only relieved of the obligation to argue that issue by the concession made by Astron and WIM 150 in the course of the trial.
The costs of Australian Zircon's claims
30 There are no other discretionary reasons which, in my view, would justify an order further adjusting the costs of Australian Zircon's claims as between the defendants. Astron and WIM 150 chose to actively participate in the proceedings. They did not merely indicate that they would abide any finding made by the court; they filed substantive defences denying Australian Zircon's claims. They were separately represented at the trial and made submissions in opposition to Australian Zircon's case. The ordinary rule is that multiple defendants are jointly and severally liable for the plaintiff's costs where the plaintiff succeeds against all of them. I can see no reason for departing from that rule, leaving the position as between the defendants to be governed by their rights of contribution.
0
4
1