Australian Zircon NL v Austpac Resources NL [No 2]
[2011] WASC 186
•4 AUGUST 2011
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: AUSTRALIAN ZIRCON NL -v- AUSTPAC RESOURCES NL [No 2] [2011] WASC 186
CORAM: CORBOY J
HEARD: 13 DECEMBER 2010
DELIVERED : 4 AUGUST 2011
FILE NO/S: CIV 1600 of 2010
BETWEEN: AUSTRALIAN ZIRCON NL
Plaintiff
AND
AUSTPAC RESOURCES NL
First DefendantASTRON LIMITED
Second DefendantWIM 150 PTY LTD
Third Defendant(BY ORIGINAL ACTION)
AUSTPAC RESOURCES NL
PlaintiffAND
AUSTRALIAN ZIRCON NL
First DefendantASTRON LIMITED
Second DefendantWIM 150 PTY LTD
Third Defendant(BY COUNTERCLAIM)
Catchwords:
Contract - Assignment - Whether farm-in agreement contained an express or implied term prohibiting transfer of or a declaration of trust over the agreement - Whether rights and obligations personal and incapable of transfer and vicarious performance - Whether possible to declare a trust over a contract that is incapable of being assigned at law
Equity - Trusts - Whether contract not assignable at law can be held on trust - Whether entire contract can be held on trust or only the benefits of performance of the contract
Legislation:
Mineral Resources (Sustainable Development Act) 1990 (Vic)
Result:
Plaintiff entitled to declaration that farm-in agreement could not be assigned by first defendant or held on trust for the second and/or third defendant - First defendant entitled to declaration that contract dealing with farm-in agreement frustrated and at an end
Category: B
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 Broadcasting Commission v Australian Performing Right Association Ltd (1973) 1 29 CLR 99
Australian Securities Commission v Marlborough Goldmines Ltd (1993) 177 CLR 485
Australian Zircon NL v Austpac Resources NL [2010] WASC 166
Barbados Trust Co v Bank of Zambia [2007] EWCA Civ 148; 1 Ll R 495
British Waggon Co and Parkgate Waggon Co v Lea (1880) 5 QBD 149
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Devefi Pty Ltd v Mateffy Pearl Nagy Pty Ltd (1993) 113 ALR 225
Don King Productions Inc v Warren [2000] Ch 291
Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603
Goodridge v Macquarie Bank Ltd [2010] FCA 67; (2010) 265 ALR 170
Gye v McIntyre (1991) 171 CLR 609
Houssein v Under Secretary, Department of Industrial Relations and Technology (NSW) (1982) 148 CLR 88
Leveraged Equities Ltd v Goodridge [2011] FCAFC 3; (2011) 274 ALR 655
Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 2010 CLR 181
Olsson v Dyson (1969) 120 CLR 365
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 149 FCR 395
Pacific Carriers v BNP Paribas (2004) 218 CLR 451
PMT Partners Pty Ltd (in liq) v Australian National Parks & Wildlife Service (1995) 184 CLR 301
Secure Parking (WA) Pty Ltd v Wilson [2008] WASCA 268; (2008) 38 WAR 350
The Movie Network Channels v Optus Vision [2010] NSWCA 111
Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2003) 219 CLR 165
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177
CORBOY J:
The action and the result
Austpac Resources NL held an exploration licence, EL 4521, over an area of land located in Victoria. Part of that area is known as the WIM 150 Heavy Mineral Sands Project (the Project Area).
Australian Zircon NL was interested in assessing the feasibility of exploiting deposits of heavy mineral sands located within the Project Area. On 29 January 2004, Austpac and Australian Zircon entered into an agreement by which Australian Zircon could earn an interest in the WIM 150 Heavy Mineral Sands Project (the Project) by completing a bankable feasibility study for conducting mining operations in the Project Area (the Farm‑In Agreement). Australian Zircon has yet to earn that interest.
On 27 March 2010, Austpac and Astron Limited entered into an agreement (the Sale Agreement) by which Austpac agreed to sell and transfer EL 4521 and to assign its 'right, title and interest in and arising out of [the Farm‑In Agreement]' to Astron. Subsequently, Astron agreed to transfer the exploration licence and Farm-in Agreement to its wholly owned subsidiary, WIM 150 Pty Ltd (WIM).
Australian Zircon did not consent to the assignments. It seeks declarations substantially to the effect that any assignment of the Farm-in Agreement is ineffective, contending that:
(a)it was an express or implied term of the agreement that the rights and obligations that it created or the benefit of the agreement could only be assigned with the consent of the non‑assigning party;
(b)the rights and obligations created by the agreement were personal to the parties and were incapable of being assigned or vicariously performed;
(c)the parties' obligations under the Farm-in Agreement could only be transferred to a third party by novation.
The Sale Agreement contained a declaration of trust by Austpac that it would hold the Farm-in Agreement on trust for Astron until an assignment or a novation of the Farm-in Agreement was 'obtained'. Austpac counterclaims for a declaration that if it is found that it was not entitled to assign 'its right, title and interest in and arsing out of' the Farm-in Agreement, it holds that right, title and interest on trust for Astron and/or WIM. It also claims a declaration against Astron and WIM that the Sale Agreement is frustrated and at an end if it is found that the benefit of the Farm-in Agreement cannot be assigned or held on trust. Astron and WIM do not oppose the declaration if the finding on which it is conditioned is made.
I have concluded that the assignment of the Farm-in Agreement or the benefit of the agreement and the declaration of trust made in the Sale Agreement were ineffective. I have also found that the court should declare that the Sale Agreement is at an end.
EL 4521
EL 4521 was granted to Austpac on 29 November 2000 pursuant to the Mineral Resources (Sustainable Development) Act 1990 (Vic) (Mineral Resources Act). The licence was initially for five years and included as a special condition a requirement that Austpac expend, in connection with exploration of the land, a minimum of $666,400 in the first year of the term of the licence and a minimum of $1,160,000 in each succeeding year (special condition 3; exhibit 1). It appears that the minimum expenditure requirements were subsequently varied: $88,680 in 2004 and $107,100 in 2005 (see exhibit 2, TB 19 and exhibit 3, TB 32; there was no evidence as to the expenditure requirements in later years).
The exploration licence was issued pursuant to s 13 of the Mineral Resources Act. Section 33(2) of the Act provides that a licence may be transferred by an instrument approved by the Minister but not otherwise. The Minister must be satisfied that the proposed transferee complied with the requirements specified in s 15(6)(a) to (d).
Part 6 of the Mineral Resource Act provides for the establishment and maintenance of a mining register. The Department Head must register, among other documents, instruments for 'creating, assigning or affecting interests in, or conferred by, licences' and for 'the devolution of licences or interests in, or conferred by, licences': s 69(xiv) and (xv).
The witnesses
The witnesses in this matter were David Brian Clarke, a former director of Australian Zircon; Michael John Turbott, the sole executive director of Austpac and John Jacques Allen, a corporate advisor to Australian Zircon and Austpac. There was no challenge to the evidence given by any of the witnesses and I accept their evidence. Accordingly, the relevant facts are largely recounted as a narrative.
Austpac
Austpac was incorporated in 1985. Mr Turbott is (and always has been) the sole executive director of Austpac. He is a geologist with many years experience in the mining industry.
As a result of being involved in a project over an ilmenite sand deposit in New Zealand, Austpac developed a proprietary roasting process known as 'enhanced roasting and magnetic separation' (ERMS). The process separates ilmenite, a mineral containing titanium dioxide and iron oxide, from other minerals such as garnet and chromite. The process was further developed by incorporating a system of leaching roasted ilmenite in hydrochloric acid to remove iron oxide and turn the product into synthetic rutile. The treated product contains a high concentration of titanium dioxide that can be used commercially to make titanium dioxide pigments or titanium metal. That process is known as the ERMS SR process.
Austpac has also developed an associated process known as the 'enhanced acid regeneration system' (EARS). That process turns ferrous chloride produced during leaching by the ERMS SR process into fresh hydrochloric acid that is recycled for use in the ERMS SR process.
Since the mid‑1990s, Austpac's business has focused on its mineral sands technologies rather than on developing and operating mining projects.
In about 2000, Mr Turbott learnt that the Victorian government had called for tenders for 14 areas or blocks in the Murray Basin and that the Project Area formed part of one of the blocks (block 1). He was aware that a very large fine grain mineral sands deposit, WIM 150, had been delineated within the Project Area by a drilling program previously undertaken by CRA. Mr Turbott was also aware that Basin Minerals had discovered strandline deposits of coarser grey heavy minerals to the west of block 1.
Austpac formed a joint venture with Ticor Ltd for the purpose of making a submission to the Victorian government for block 1. The submission was accepted and on 1 December 2000, EL 4521 was granted to Austpac and Ticor. In 2001 and 2002, the joint venturers explored the western part of EL 4521 without finding commercially viable coarse grain heavy minerals. Nevertheless, preliminary work undertaken at around this time indicated that the fine grained ilmenite from the WIM 150 deposit could be treated using the ERMS SR process to produce synthetic rutile. However, the product was not of an acceptable quality for making pigments or titanium metal.
Ticor withdrew from the joint venture in 2002. Austpac formed a new joint venture with Newcrest Ltd to explore for copper and gold in the basement rocks below the mineral sand horizons. Newcrest funded exploration drilling programs in 2002 and 2003 but elected to terminate the joint venture in August 2003.
Mr Turbott was then concerned that Austpac could lose EL 4521 as the company did not wish to divert its limited financial resources from developing its technologies to meeting the expenditure requirements for the licence. His principal interest at the time was to ensure that the expenditure requirement was satisfied, although he also stated that (exhibit 16, par 21):
Even though I did not think it likely that Austpac would be able to use the ilmenite in WIM 150, as it was too fine to process into synthetic rutile, WIM 150 was a large ilmenite deposit which I wanted Austpac to retain. I felt there might be some potential in further investigating the agglomeration processes to make a coarser synthetic rutile.
He discussed those matters with Mr Allen during 2003.
Australian Zircon
Australian Zircon was registered in 1994. Mr Clarke was a director of the company between March 2001 and October 2009. He has qualifications in geology and has been involved in businesses in the resources industry since 1983 (ts 72).
As at the date of the Farm-in Agreement, the other directors of Australian Zircon were Jeremy David Shervington (appointed in February 1998), John Gilbert Branson (appointed in January 1999) and Stephen Brian Hunt (appointed in November 2002). Brian James Rear was the chief executive. He was responsible for negotiations over the Farm-in Agreement (Mr Clarke, ts 65).
The directors of Australian Zircon considered tendering for block 1 but decided not to proceed on advice from Mr Clarke that the mineral sands contained within the WIM 150 deposit were too fine to be recovered economically. That advice was based on test work previously undertaken by CRA.
Mr Clarke gave evidence of his knowledge of the Project Area at the time of the Farm‑in Agreement. In particular, he knew that in around 1982 CRA had discovered the WIM 150 deposit and other mineral sand bodies in western Victoria; that the WIM 150 deposit comprised unusually fine grained sands and that CRA had relinquished its various tenements in western Victoria in the late 1990s. I infer that he knew about those matters at the time that Australian Zircon decided not to lodge an application for block 1. I draw that inference from his evidence concerning the advice that he gave to the other directors of Australian Zircon at that time.
Mr Clarke subsequently learnt that various technologies had been developed which he believed meant that it was likely that the WIM 150 deposit could be economically mined. He was aware of the technology and processes developed by Austpac by the time that the Farm-in Agreement was negotiated. However, he also knew that Austpac's technology was applied to process ilmenite. Australian Zircon's primary interest in the deposit was as a source of zircon rather than ilmenite.
Further evidence of Australian Zircon's knowledge of the Project Area and the WIM 150 deposit at the time that the Farm-in Agreement was made was provided by a document entitled 'WIM 150 Summary Report' (exhibit 5). The document was undated but it was sent by email by Mr Rear to Mr Allen on the day before the Farm‑in Agreement was signed. It indicated that Australian Zircon believed that:
(a)Austpac had undertaken a limited evaluation of the deposit with an emphasis on producing ilmenite concentrate for analysis using the ERMS technique to produce synthetic rutile;
(b)CRA had experienced problems in recovering heavy minerals from the deposit but a preliminary review of its data suggested that high grades were possible and that this might overcome lower recoveries;
(c)technology had been developed since the time that CRA had assessed the deposit and it appeared that acceptable recoveries could now be achieved;
(d)the WIM deposits in Victoria represented the most concentrated and rich sources of zircon worldwide and there was little doubt that the deposits would become increasingly valuable.
The report concluded with the statement that, 'the strategy is to secure access to this deposit for minimal commitment over the next few years and to determine in that time whether the minimum recovery benchmarks are achievable and warrant a feasibility study'.
Mr Allen
Mr Allen is and has been since 2001 an executive director of Carlisle Partners, a corporate advisory firm. Mr Allen was at one time a partner in Allen Allen & Hemsley. He first met Mr Turbott in about 1978 while working for that firm. They became friends and business colleagues and Mr Allen has acted as an advisor to Austpac from when it was incorporated in 1985.
Australian Zircon became a client of Carlisle Partners in March 2003.
Mr Allen was aware of the following matters concerning Austpac by late 2003:
(a)Austpac's core business was and had been for some years, the development of its technologies. It was not and never had been in the business of developing or operating mines and it was moving away from exploring for minerals as part of its business.
(b)Austpac had held EL 4521 since 2000 and the Project Area formed part of the land that was the subject of the licence.
(c)Deposit WIM 150 was a known and very significant zircon resource that had not been developed. It also contained ilmenite. Austpac had applied for the exploration licence principally for the ilmenite mineralisation rather than for the zircon resource.
(d)Austpac could not afford to continue to explore or develop the WIM 150 deposit. In any event, it did not need to exploit the deposit as it could obtain access to sufficient ilmenite from other sources for the development of its technologies.
(e)Austpac wished to keep an interest in EL 4521. However, it was commercially sensible for Austpac to spend its limited funds on the development of its technologies and if possible, allow someone else to meet the expenditure requirements for maintaining the exploration licence.
Mr Allen was also aware by late 2003 that Australian Zircon was looking to become a heavy minerals 'mining house' with a focus on zircon and that accordingly, it was moving its business away from titanium based heavy minerals, such as ilmenite and rutile, to zircon. Consequently, he surmised that it might be possible to effect a deal between Austpac and Australian Zircon that could facilitate their respective commercial objectives.
The Farm-in Agreement
Nearly every provision of the Farm‑in Agreement was referred to by the parties in their submissions and it will be necessary to closely consider its terms when analysing the issues to be decided. Consequently, I have annexed a copy of the agreement to these reasons rather than attempt an overview of its provisions.
It is admitted that an interest said to be created by the Farm‑in Agreement was registered against EL 4521 pursuant to the Mineral Resources Act. A letter dated 3 February 2004 from Austpac to the Victorian Department of Primary Industries requesting registration described the Farm‑in Agreement as a joint venture agreement. It also described the nature and purpose of the agreement in terms that were apparently adapted from an announcement made to the Stock Exchange following its signing. The announcement is referred to in more detail later in these reasons.
The making of the Farm-in Agreement
Some time around October 2003, Mr Allen approached Mr Turbott about the possibility of a farm‑out of the WIM 150 deposit. By an email sent on 27 October 2003, Mr Allen advised Mr Rear that Mr Turbott was willing to negotiate a farm‑out (exhibit 21). The email stated:
What we [Mr Allen and Mr Turbott] discussed was a commitment to fund expenditure, in an amount to be discussed, including whether R&D or exploration, but of course at least sufficient to meet work commitments to maintain the title in good standing. There would be a carry thru to FS and then an option for Austpac to elect to contribute at an agreed level or convert to an agreed NPI.
Mr Turbott gave evidence that he was interested in farming out the Project to 'any company that had the money to spend on it and who might be able to develop a mining project on EL 4521 so that Austpac might eventually be able to benefit from the deposit at no cost' (exhibit 16, par 22).
Mr Allen stated that he disclosed to Mr Turbott and Mr Rear the objectives of each party in undertaking the transaction 'in the interests of being transparent' as he was acting as an advisor to both companies (exhibit 18, par 15). He obtained an authority from Mr Turbott and Mr Rear to exchange information for that purpose (ts 133 ‑ 134).
Mr Allen also stated that he prepared the first draft of a 'term sheet' for the farm‑in (exhibit 18, par 12(d)). He did not produce the draft in evidence nor did he identify any document discovered by the parties as being a copy of the term sheet that he prepared. However, Mr Turbott gave evidence that was not challenged that he asked Mr Allen to prepare a draft of the farm‑in agreement and that he recalled that a draft was provided to him for comment following that request (exhibit 16, par 28).
The first version of the draft Farm‑in Agreement produced in evidence was attached to an email sent by Mr Rear to Mr Allen on 18 December 2003 (exhibit 25). The draft was in very similar terms to the agreement as concluded except that:
(a)it referred only to base metals and not to base and precious metals;
(b)the draft did not contain a definition of a bankable feasibility study;
(c)the draft provided that Australian Zircon was entitled to earn a 50% interest in the Project upon expending $200,000 in respect of the Project Area and an 80% interest upon completion of a bankable feasibility study;
(d)the draft provided for Austpac to have one month following completion of the bankable feasibility study to elect whether to maintain a 20% contributing interest or convert to a 10% net profit interest;
(e)Australian Zircon was required to provide 'all necessary' reports to Austpac on the work undertaken in respect of the Project Area (cl 4) ‑ the clause was subsequently amended to require the reports to be in the format required by the Victorian Department of Primary Industries;
(f)the parties were to negotiate a more definitive agreement and joint venture arrangement following Australian Zircon earning a 50% interest in the Project; that is, under the draft, after Australian Zircon had spent $200,000 (cl 9).
The amendments that were subsequently made to the draft agreement as sent by Mr Rear to Mr Allen on 18 December 2003 appear to have been largely drawn from amendments marked up on a draft that was sent by Mr Turbott to Mr Rear by email on 22 December 2003 (exhibit 2). In particular, Mr Turbott:
(a)added a reference to precious metals;
(b)highlighted the need for a definition of a bankable feasibility study;
(c)indicated that the point at which the parties should negotiate a more definitive agreement and joint venture arrangement needed to be identified but that the point was not to be on completion of the bankable feasibility study.
It should be noted that the draft of the Farm-in Agreement sent by Mr Turbott to Mr Rear incorporated a further amendment that apparently had been agreed some time between the draft sent by Mr Rear to Mr Allen on 18 December and the draft of 22 December 2003. Clause 2 of the draft had been amended to delete the two stages by which Australian Zircon could earn an interest in the Project. The revised clause provided that Australian Zircon would earn an 80% interest in the Project upon completion of the bankable feasibility study.
A further version of the draft agreement was sent by Mr Rear to Mr Allen on 8 January 2004 (exhibit 26). That version was substantially in the same form as the draft sent by Mr Turbott to Mr Rear on 22 December 2003 but a definition of 'bankable feasibility study' had been added. The work program to be undertaken by Australian Zircon in the first two years of the agreement was also amended and expanded.
Mr Turbott commented on the 8 January 2004 draft in an email sent to Mr Allen on the same day (exhibit 3). He asked that the definition of 'bankable feasibility study' be further amended 'so that it is clear that a significant amount of work will need to be completed before a BFS is finalised'. He also inquired as to when a more definitive agreement should be negotiated ‑ 'before, on or after completion of year two? After [Australian Zircon] spends $1M? We only want this expense if the Project is clearly defined and going forward, but certainly before the BFS'.
On the evidence, no further drafts of the Farm‑in Agreement were exchanged before signing. Accordingly, the question of when a more definitive agreement and joint venture arrangement was to be negotiated was resolved by the adoption of the words in cl 9, 'if [Australian Zircon] elects to proceed to bankable feasibility study'. There was no direct evidence as to how those words came to be chosen. Mr Turbott indicated in his email of 8 January 2004 that the board of Austpac would consider the proposed agreement at a meeting to be held on 22 January. He concluded his email by stating, '[t]rust you/Brian can tidy the document so I can send it out with my board papers'. The inference is that the final form of cl 9 was drafted by either Mr Allen or Mr Rear and incorporated into a draft that was circulated and eventually adopted by the parties.
The announcement of the Farm-in Agreement
At the end of January 2004, Mr Rear circulated to Mr Turbott and Mr Allen a draft announcement to the Stock Exchange of the Farm‑in Agreement (exhibit 4). Further drafts were exchanged in early February (exhibits 23 and 24), with the announcement being made on 9 February (exhibit 7). The version of the announcement that was tendered in evidence was provided to the Stock Exchange by Austpac (exhibit 7). However, I infer from exhibits 4, 23 and 24 that the announcement was in a form that was agreed between Austpac and Australian Zircon and that the corresponding announcement by Australian Zircon would have been in substantially identical terms.
The announcement stated that the 'strategic importance' of the Farm‑in Agreement arose from several matters, including that:
(a)An 'alliance' would be formed through the agreement that would draw on the significant experience of each party.
(b)Australian Zircon had experience in the testing and design of processes for the recovery of relatively fine grained heavy mineral sands and believed that advances in gravity separation processes and subsequent mineral separation of heavy minerals at fine sizes would lead to the design of a viable project around the WIM 150 resource.
(c)Austpac had already tested the processing of WIM 150 ilmenite, using its proprietary processes. The deposit contained approximately 12.5 million tonnes of ilmenite. The results on ilmenite from the WIM 150 deposit and some other Murray Basin deposits had been encouraging and through Austpac, Australian Zircon planned to undertake larger scale pilot plant work.
(d)Australian Zircon believed that the WIM deposits in Victoria represented the most concentrated and rich sources of zircon worldwide. Given the rapidly declining ratio of zircon to ilmenite in the known but as yet undeveloped deposits, there was little doubt that the deposits would become increasingly valuable. The WIM 150 deposit contained approximately 5 million tonnes of zircon and preliminary analysis suggested production of 140,000 tonnes per annum could be possible. Production at that level would make Australian Zircon a major supplier of zircon.
(e)Australian Zircon considered that the WIM 150 deposit had a number of attributes that would facilitate a low capital expenditure.
The announcement concluded by stating that the Farm‑in Agreement positioned Austpac to receive financial benefits from the deposit without requiring any immediate cash investment. That allowed Austpac to concentrate on opportunities for commercialising its technology.
The appointment of the Administrator
A voluntary administrator (the Administrator) was appointed to Australian Zircon on 9 October 2009. Subsequently, the creditors of Australian Zircon entered into a deed of company arrangement. The company was still under administration at the time that the Sale Agreement was made. It appears that the Administrator was advised that the agreement had been made on 29 March 2010 (that is, two days after the agreement was executed) (exhibit 11).
The Sale Agreement
The Sale Agreement provided for the sale and purchase of 'the Business and the Assets' (cl 2.1).
The term 'Assets' was defined by cl 21.1 of the agreement to mean 'all interest, right and title of [Austpac]' to, among other things, the 'EL' and the 'Contracts'. The term 'EL' was defined to mean EL 4521. The term 'Contracts' referred to those contracts described in sch 2 to the Agreement. The Farm-in Agreement was the only contract identified in sch 2.
The term 'Business' was defined to mean 'the mineral exploration business as related to the EL as carried on by [Austpac] (including with the assistance of [Australian Zircon] under the Farm‑In Agreement) immediately before Completion, and for the purposes of clarification, shall not include Technology or any other proprietary technology known as EARS or ERMS'.
The Agreement recited that Austpac had entered into a farm‑in agreement in relation to the 'Project'. The terms 'Project' and 'Project Area' were defined to have the same meaning as that given in the Farm‑in Agreement (cl 21.1). It was further recited that an interest had been created and registered over El 4521 under s 71 of the Mineral Resources Act in favour of Australian Zircon.
The operative provisions of the Sale Agreement included that:
(a)title to the 'property in and risk of [EL 4521] remains with Austpac until Transfer' (defined to mean a transfer in terms of s 33 of the Mineral Resources Act) and passed to Astron 'upon Transfer' (cl 2.3);
(b)title to the 'property in and risk of the Business and the Assets remains with [Austpac] until the Effective Time' (defined to mean the close of business on the date of Completion, which was, in turn, defined to mean completion of the sale and purchase of the Business and the Assets in accordance with the agreement) and passed to Astron from that time (cl 2.4);
(c)Astron was required to lodge the documentation for the transfer of EL 4521 within 10 business days of payment of a deposit into an escrow account (cl 4.3);
(d)the deposit would be at Astron's written election refundable upon demand if EL 4521 had not been transferred from Austpac to Astron within 90 days of the lodgement of the documentation for the transfer (cl 4.4);
(e)Completion under the agreement was conditional on the transfer of EL 4521 from Austpac to Astron free from any security interest other than the Farm‑in Agreement (cl 6.1.1);
(f)if all of the conditions precedent were not fulfilled, or to the extent that they were capable of waiver, were waived in writing by Astron within 90 days of the execution of the agreement or such later date as was agreed in writing, Astron could by written notice to Austpac terminate the agreement and upon termination each party was relieved of any further obligation under the agreement and all money received by Austpac was to be refunded in full (cl 6.5 and cl 6.6);
(g)from the date of the agreement until Completion, Austpac was required not to do anything in relation to EL 5421 or the Farm‑in Agreement nor communicate with Australian Zircon without Astron's prior written approval (cl 7.1.3);
(h)Austpac was also obliged to assist Astron by cooperating with it in taking such reasonable action as Astron determined in relation to negotiations with, and any litigation against, Australian Zircon in relation to the Farm‑in Agreement (cl 7.3);
(i)at Completion and with effect from the Effective Time, Austpac assigned and transferred to Astron the right, title and interest that it held in or arising out of the Contracts and Astron accepted the assignment and transfer and assumed all of the obligations of Austpac 'in and arising out of the Contracts' (cl 10.1);
(j)in relation to each of the Contracts, until an assignment or a novation was obtained or until the Contract ended, Austpac was obliged if the assignment or novation was unable to be obtained (cl 10.4):
(i)to hold the Contract on trust for Astron;
(ii)at Astron's expense, to enforce the Contract against the other party to the Contract in the manner that Astron reasonably directed;
(iii)to perform any obligation or exercise any right under the Contract at the request and expense of Astron;
(iv)to pay all benefits arising from the Contract to Astron;
(v)not to agree to any amendment of the Contract or waiver of its rights under the Contract without Astron's written consent.
(k)Astron was obliged to 'duly perform the Contract on behalf of [Australian Zircon] at its own expense' prior to an assignment or a novation of the Contract being obtained (cl 10.4.6).
(l)if any clause or part of a clause was 'illegal, unenforceable or invalid', the clause or part of the clause was to be treated as being removed from the agreement but the rest of the agreement was unaffected by the removal (cl 20.12).
There was an issue concerning the effect of the provisions of the Sale Agreement: was the intended subject matter of the assignment and the declaration of trust the bundle of rights, obligations and powers comprising the whole of the Farm-in Agreement (so that the obligations imposed by the agreement, as well as the benefit of performance of those obligations, were to be assigned or held on trust) or did the Sale Agreement only provide for an assignment of or trust over the benefit of the Farm-in Agreement? The latter construction would leave open the possibility that the Sale Agreement only contemplated that Astron would vicariously perform the obligations imposed by the Farm-in Agreement so that a novation was not necessary to give effect to the Sale Agreement.
Events subsequent to the Sale Agreement
On 30 March 2010, Astron's solicitors wrote to the Administrator stating that Astron considered that the Farm‑in Agreement had been terminated by the effluxion of time and that in any event, Australian Zircon was 'in material breach of material terms' so that Astron terminated the agreement if it had not already been terminated (exhibit 12). It is not necessary to further identify the grounds upon which it was asserted that Astron was entitled to terminate the Farm‑in Agreement.
By letter dated 1 April 2010, the solicitors for the Administrators denied that the Farm‑in Agreement had been terminated. They also asserted that the transfer by Austpac of any interest in the Project Area was a breach of the Farm‑in Agreement (exhibit 13).
At the same time, the Administrators' solicitors wrote to the Victorian Minister for Energy and Resources requesting that the Administrator be given an opportunity to make submissions regarding any application made by Austpac and/or Astron for approval of a transfer of EL 4521 (exhibit 14). Shortly afterwards, the chairman of Astron wrote to the Minister confirming that an instrument of transfer relating to EL 4521 had been submitted for his approval and contending that the Administrator should not be provided with an opportunity to make submissions regarding the application (exhibit 19).
The issues to be decided
The alternative grounds on which Australian Zircon alleges that a transfer of Austpac's rights and obligations under the Farm-in Agreement to Astron was or would be ineffective have already been noted. Those grounds concern whether:
(a)The parties' rights and obligations under the Farm‑in Agreement are properly to be characterised as personal and incapable of being transferred without the consent of the non‑assigning party (par 7 of the statement of claim). It was also contended at trial that the rights and obligations created by the agreement were so interdependent as to be incapable of assignment. In addition, the interdependent nature of the obligations was relied on as a significant textual indication that the parties intended to prohibit assignments under the Farm‑in Agreement.
(b)Clause 7, read with the recitals to the Farm-in Agreement and cl 1, cl 2, cl 4, cl 5 and cl 9, prohibited the transfer of any of the parties' rights and obligations under the agreement without the non‑assigning party's consent (par 8(a) of the statement of claim).
(c)A term prohibiting assignment without the non‑assigning party's consent was to be implied into the Farm-in Agreement having regard to the subject matter and provisions of the agreement (par 8(b) of the statement of claim).
There was a further issue about whether Austpac's obligations under the Farm‑in Agreement were capable of being transferred without a novation of the agreement. As previously noted, that issue raised a question concerning the construction of the Sale Agreement and whether it provided for an assignment of or a trust over the rights and obligations comprising the whole of the Farm‑in Agreement or whether it contemplated that only the benefit of the agreement would be assigned or held on trust and that Astron would vicariously perform Austpac's obligations under the agreement.
There is a further question bound up in this issue: whether the obligations imposed by the Farm‑in Agreement were capable of being vicariously performed. The answer to that question turns on whether the obligations were personal to Austpac.
Austpac alleges in its defence (par 5) a number of matters that were said to have been known to the parties at the time that the Farm-in Agreement was made and against which the agreement is to be construed; the 'surrounding circumstances known to the parties and the purpose and object of the transaction': Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2003) 219 CLR 165. Whether the evidence established that both parties knew all of the matters that are alleged is considered later in these reasons.
Paragraph 14 of the statement of claim pleads that in or about May 2010, Astron purported to assign to WIM all of its alleged right, title and interest in the Sale Agreement, reference being made to a letter dated 20 May 2010 from Astron to Austpac. Austpac admits those matters (except to deny the allegation implicit in the use of the words 'purported' and 'alleged' to describe the assignment and the interest that was to be assigned). Astron and WIM deny par 14 of the statement of claim but it is apparent that their denial went to the allegation that Astron's interest in the Sale Agreement could not be assigned insofar as it provided for a transfer of Austpac's rights and obligations under the Farm‑in Agreement. It was not in issue that there had been an agreement by which Astron's interest in EL 4521 and the Sale Agreement (whatever that might be) had been assigned or was to be assigned to WIM (neither the letter of 20 May 2010 nor any form of agreement or other instrument made between Astron and WIM was put into evidence).
Austpac counterclaims for declarations concerning the effect to the Sale Agreement:
(a)a declaration that it was entitled to assign its 'right, title and interest in and arising out of the Farm‑in Agreement' to Astron and/or WIM 150;
(b)alternatively, a declaration that if it was not so entitled, it held its right, title and interest in or arising out of the Farm‑in Agreement on trust for Astron and/or WIM.
Austpac initially claimed declarations that referred to the rights and obligations created by the Farm‑in Agreement. The prayer for relief was amended at trial to refer to Austpac's 'right, title and interest in and arising out of the Farm‑in Agreement'. Further reference is made to the effect of the amendment when the construction of the Sale Agreement is considered.
Australian Zircon alleged by reply that the declaration of trust in cl 10.4 of the Sale Agreement was contrary to the terms of the Farm-in Agreement for the same reasons that any assignment of the agreement or the benefit of the agreement was prohibited.
Four issues arise in relation to the declaration of trust made by Austpac in the Sale Agreement:
(a)What is it that constitutes the trust property under the terms of the Sale Agreement?
(b)Can a person declare themselves to be a trustee of a contract that is not assignable at law (because, for example, the rights and obligations created by the contract are personal in character or are so interdependent as to be incapable of assignment)?
(c)Can a contractual obligation constitute property so that it may be held on trust?
(d)Does the Farm‑in Agreement expressly or impliedly prohibit Austpac from declaring itself to be a trustee of its 'right, title and interest in and arising out of the Farm‑in Agreement'?
The second matter about which Austpac seeks a declaration concerns the effect of a finding that the Farm-in Agreement or the benefit of the agreement could not be assigned or held on trust. As mentioned in the introduction to these reasons, Austpac claims a declaration against Astron and WIM that the Sale Agreement was frustrated and at end on 3 May 2010 if that finding is made. Astron and WIM denied that a declaration should be made by their defences to Austpac's counterclaim. However, they agreed at trial that the Sale Agreement should be declared to have been frustrated and at end if it was found that the benefit of the Farm-in Agreement could not be assigned or held on trust.
It is proposed to first consider whether cl 7 prohibited the assignment of the Farm‑in Agreement and/or a declaration of trust over the agreement. That will involve, among other things, an analysis of the nature of the rights and obligations created by the agreement. The analysis will necessarily overlap with the question of whether the provisions of the agreement are to be characterised as personal in the sense alleged in par 7 of the statement of claim or interdependent as Australian Zircon contended. However, different questions of construction are raised by the allegations made in par 7 and par 8 of the statement of claim.
Paragraph 8 is concerned with the meaning and effect of cl 7 of the Farm‑in Agreement. The nature of the rights and obligations created by the agreement is an important textual consideration in construing the clause but it is not the focus of the process of construction. Paragraph 7 of the statement of claim, on the other hand, is not directly concerned with the meaning and effect of cl 7. The pleading alleges that the rights and obligations created by the Farm‑in Agreement were by their nature incapable of being assigned or that the agreement, when considered in its entirety, was a personal contract. Obviously, that raises questions of construction about the rights and obligations concerned and the agreement as a whole. Those questions of construction are answered by ascertaining whether the parties intended that the rights and obligations created by the contract were personal and non-delegable and not by determining whether they contemplated an assignment or a trust.
The parties identified several matters that they regarded as providing context for the interpretation of cl 7. It is proposed to first deal with those matters and to then return to the question of the construction of the clause (the same matters were also relevant to the allegation of an implied term). Findings will be made about the contextual matters for the purpose of the allegations made in both par 7 and par 8 of the statement of claim where that is appropriate and convenient. It is also necessary to consider at the outset the question of the intended subject of the assignment and declaration of trust contained in the Sale Agreement.
The effect of the assignment and trust provisions of the Sale Agreement
It is to be noted that the Sale Agreement defined and treated the Farm‑in Agreement as an asset ‑ something that could be owned, sold, passed, assigned and held on trust. It was Austpac's title to the property in that asset that was said to 'pass' to Astron under cl 2.4. More particularly, cl 10.1 of the Sale Agreement provided for the assignment of Austpac's 'right, title and interest in and arising out of' the Farm‑in Agreement. That is an expression of wide import. It apparently refers to Austpac's title to (ownership of) the bundle of rights, obligations and powers that together comprised the Farm‑in Agreement. That is seemingly confirmed by the balance of cl 10.1 that provided that Astron assumed all of the obligations 'in and arising out of' the Farm‑in Agreement. The expressions used in cl 10.1 suggest that, consistent with cl 2.4 (and the stated effect of the agreement as a contract providing for the sale and purchase of the Business and the Assets), the parties intended that more would be assigned than just the benefit of the agreement.
The declaration of trust in cl 10.4 is over 'the Contract'; that is the Farm‑in Agreement. The parties did not explore in argument why cl 10.4 referred to 'the Contract'. At least, two explanations are possible. First, the reference was an imprecise way of referring to the benefit of the Farm‑in Agreement. Second, the parties intended that the subject matter of the trust would be the bundle of rights, obligations and powers comprising the whole of the Farm‑in Agreement but they recognised the differences between an assignment under cl 10.1 and a trust in drafting cl 10.4. The assignment expressly referred to Astron assuming the obligations imposed by the Farm‑in Agreement; that formed part of what was to occur on the assignment. The trust operated until an assignment or novation could be obtained. The obligations imposed by the Farm‑in Agreement formed part of the trust but they were not assigned to and assumed by Astron and so it was necessary to expressly provide for their performance in cl 10.4. (I am here only considering what the parties may have intended by the wording of the relevant provisions and not their legal effect.)
Paragraph 10 of the statement of claim alleged that 'Austpac purported to agree with Astron to transfer Austpac's rights and obligations under the Farm‑in Agreement to Astron…'. Austpac admitted the allegation: par 7 of its defence and counterclaim. It also alleged in its defence that the Sale Agreement was premised on 'Austpac being able to assign its rights and obligations, alternatively its rights, under the Farm-in Agreement…': par 13.
Astron and WIM denied par 10 of the statement of claim and pleaded other matters in answer to the allegations made in that paragraph that did not clarify the intended effect of the denial: par 6 of their defence. They alleged that Austpac's 'interest' in the Farm-in Agreement was capable of assignment: par 4.2.
In oral submissions, senior counsel for Austpac emphasised that cl 10.1 of the Sale Agreement only provided for an assignment of the benefit of the Farm-in Agreement; it did not assign Austpac's obligations under the agreement. That part of the clause that referred to Astron assuming all of the obligations in or arising out of the Farm‑in Agreement was to be understood as providing for a permitted delegation of the performance of those obligations to Astron (ts 162; and see Austpac's trial submissions, par 43). It was also submitted that, if necessary, the clause was to be read in that way after applying the provisions of cl 20.12.
It was in this context that Austpac's amendment to its prayer for declaratory relief was explained. It was said that the amendments brought the relief claimed 'into line' with the submissions concerning the effect of cl 10.1 (ts 162). The amendment to prayer A concerning the entitlement claimed by Austpac to enter into an assignment with Astron and/or WIM was to substitute the phrase 'right, title and interest in and arising out of the Farm‑in Agreement' for the expression 'rights and obligations, alternatively rights, under the Farm‑in Agreement'.
Significantly, the same amendment was made to prayer B concerning the effect of the declaration of trust contained in the Sale Agreement. That amendment inferentially provided the only explanation by Austpac of the meaning of the expression 'the Contract' when used in cl 10.4; that is, that the trust property was the benefit of the Farm-in Agreement.
In my view, the interpretation sought to be placed by Austpac on cl 10.1 and cl 10.4 of the Sale Agreement is inconsistent with the effect of the agreement read as a whole: the definition of the Farm-in Agreement as an asset, the sale and purchase of the agreement as an asset, the 'passing' of the agreement on Completion, the letting of Astron 'into possession' of the agreement under cl 9.3.1 and the width of the expression 'right, title and interest in or arising out of the Farm-in Agreement'. Further, the expression 'assumes all of the obligations of [Austpac] in or arising out of the [Farm-in Agreement]' is not apt to describe a delegation in the performance of those obligations. Moreover, it is to be expected that the parties would have made further provision for the consequences of the delegation had that been intended; for example, by provisions similar to those contained in cl 10.4. I also prefer the second explanation suggested earlier for the use of the term 'the Contract' in cl 10.4 for all of those reasons.
In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, a building contract provided that neither the employer nor the contractor could without the consent of the other 'assign this contract'. Lord Browne‑Wilkinson observed at (103) that the clause was 'unhappily drafted in that it refers to an assignment of "the contract". It is trite law that it is, in any event, impossible to assign "the contract" as a whole, ie including both burden and benefit'. He continued, '[a]lthough it is true that the phrase "assign this contract" is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned'. In Don KingProductions Inc v Warren [2000] Ch 291, Lightman J considered (103) that those observations should be taken as establishing the proposition that '[a] provision for the assignment of a contract is to be construed as the assignment of the benefit of the contract'.
With respect, I do not find the proposition that an expression such as 'assign this contract' (or even more so, 'right, title and interest in and arising out of …') is to be construed according to 'what every lawyer knows' to be overly attractive, especially when the resulting construction is seemingly inconsistent with the overall effect of an apparently carefully and comprehensively drawn document in which the expression appears. Further, I do not consider that cl 20.12 can be invoked to alter the effect of cl 10.1 and cl 10.4 in the manner suggested by Austpac. Applying cl 20.12 in that way would alter in substance what was to be conveyed by the Sale Agreement on the interpretation that I prefer rather than to merely excise from the agreement some unenforceable and severable aspect.
However, as the matter is not free from doubt in the light of the observations of Lord Browne‑Wilkinson and Lightman J, the parties' various arguments will be considered on the basis that it is open to interpret the Sale Agreement as providing for an assignment of or declaration of trust over the rights and obligations in the Farm-in Agreement (as Australian Zircon contends), alternatively as an assignment or trust of the benefit of the agreement coupled with a delegation of performance (as Austpac contends).
The matters known by each party
Aspects of the parties' knowledge of the circumstances in which the Farm‑in Agreement was negotiated have been noted.
Paragraph 5 of Austpac's defence pleaded particular matters that were alleged to have been known by both parties at the time that the Farm‑in Agreement was made. Mr Clarke was cross‑examined without objection about his beliefs concerning those matters and on the knowledge of the board of Australian Zircon:
(a)He had believed that Austpac was principally engaged in the business of developing and commercialising technologies for the production of synthetic rutile from 'off-spec' ilmenite or from all ilmenite (exhibit 15, par 53; and see par 5.1 of Austpac's defence). He was 'comfortable saying' that the board of Australian Zircon 'would have had that understanding of Austpac' (ts 69).
(b)He had believed that Austpac's principal interest in the Project was to encourage a mine operator to bring the WIM 150 resource into production 'in the hope that Austpac would then be able to secure contracts for the use of its ilmenite upgrade technology on the off‑spec ilmenite which would be produced as a co‑product or by‑product' (exhibit 15, par 54). Mr Clarke stated that he was 'comfortable to say that that is the way that I explained Austpac's position to Australian Zircon's board' (ts 69). Paragraph 5.2 of Austpac's defence alleged that the parties knew that 'Austpac's principal interest in the Project Area was the ilmenite it contained'. Paragraph 5.6.2 of the defence pleaded that the parties knew that Austpac was interested in making an agreement with a party that could possibly develop and operate a mining project on EL 4521 in which eventually Austpac could be, at its option, a non‑active recipient of any income produced.
(c)He had believed that Austpac was not an operator of any mining projects nor 'did it have any intentions or ambitions in this regard' (exhibit 15, par 55; and see par 5.3 of Austpac's defence). Mr Clarke stated that he believed that he explained that matter to Australian Zircon's board (ts 69).
(d)He had believed that EL 4521 was not central to Austpac's business, 'other than in the sense that, if developed, it might give rise to a contract for the use of the Austpac proprietary technology' (exhibit 15, par 56 and see par 5.4 of Austpac's defence). Mr Clarke again stated that he believed that he explained that matter to the board of Australian Zircon (ts 69).
(e)He had believed that the Project was designed to produce a range of mineral products, including zircon, rutile, ilmenite and monazite, rather than just zircon (exhibit 15, par 57). Mr Clarke stated that he was 'completely confident that the board understood that a resource like this needed to produce a range of products' (ts 69).
(f)He had believed that Austpac had the expertise to contribute to the processing of the ilmenite but not in respect of minerals such as zircon, rutile and monazite (exhibit 15, par 58). Mr Clarke stated that he believed that 'the board would have been of the same view as I was in this instance also' (ts 69). He confirmed that to his understanding the technologies developed by Austpac had no relevance to the processing of zircon (ts 71). Paragraph 5.5 of Austpac's defence alleged that the parties knew that Austpac had no special or distinguishing expertise to contribute to the development or operation of a zircon mining project on EL 4521.
Parts of Mr Clarke's oral evidence concerning the knowledge of the board of Australian Zircon were to the effect that he had informed the board about particular matters. However, other parts of his evidence were expressed as statements of belief about the board's knowledge. No objection was taken to the cross‑examination of Mr Clarke and no submission was made to the effect that Austpac had failed to prove the matters pleaded in par 5 of its defence on the ground that Mr Clarke's evidence merely reflected his beliefs about the board's knowledge rather than that it established the board's actual knowledge. Accordingly, all of Mr Clarke's evidence has been considered in determining what matters were known to each party at the time that the Farm‑in Agreement was made.
Mr Allen's knowledge of the circumstances and objectives of Australian Zircon and Austpac in negotiating the Farm‑in Agreement was summarised earlier in these reasons. He gave evidence that he informed Mr Rear about matters known to him concerning the circumstances and objectives of Austpac and Mr Turbott about the position of Australian Zircon. Accordingly, his evidence about the knowledge that he possessed of each party prior to the making of the Farm‑in Agreement also forms part of the material from which findings about the circumstances known to both parties have been drawn.
I find in relation to the allegations made in par 5 of Austpac's defence that Austpac and Australian Zircon knew that:
(a)Austpac was principally engaged in the business of developing and commercialising technologies for the production of synthetic rutile from ilmenite;
(b)Austpac was not in the business of developing or operating mines and it was moving away from exploring for minerals as part of its business;
(c)Austpac had applied for EL 4521 principally for the ilmenite mineralisation and not for the zircon resource;
(d)Austpac could not afford to continue to explore or develop the WIM 150 deposit and it was interested in making an agreement with a party that could meet the minimum expenditure requirements to maintain the exploration licence;
(e)Australian Zircon had changed or was in the process of changing its business focus from the development and operation of titanium mining projects to the development and operation of zircon mining projects and it was primarily interested in Project Area as a source of zircon.
I also find by reference to the recitals and terms of the Farm‑in Agreement that the parties knew that:
(a)Australian Zircon was interested in investigating whether the WIM 150 deposit could be economically mined;
(b)Austpac was interested in participating in any exploitation of the WIM 150 deposit by either a minority participating interest in a joint venture or a net profit interest and that it had the opportunity to do so at no cost if it chose;
(c)Australian Zircon was willing to develop the WIM 150 deposit as a mining operation by a joint venture in which it held at least an 80% interest or through which it shared the net profits of the operation.
Finally, I find on the evidence of Mr Turbott, Mr Allen and Mr Clarke considered as a whole and from the terms of the Farm‑in Agreement that:
(a)Australian Zircon knew that Austpac had no particular expertise in the mining or processing of zircon and that Austpac's technology was for processing ilmenite and had no application to processing zircon.
(b)The WIM 150 deposit contained ilmenite.
(c)Austpac had some commercial interest in the ilmenite. It is not possible to make a more precise finding about the nature of that interest. It is not clear whether Mr Clarke's evidence that Austpac wished to be able to secure contracts for the use of its technology on off‑spec ilmenite corresponds with the interest in the WIM deposit expressed by Mr Turbott at par 21 of his witness statement (exhibit 16) that was reproduced earlier in these reasons. The matter was not further clarified in the evidence.
The parties' commercial objectives
The provisions of the Farm‑in Agreement are spare. The agreement was quickly negotiated with only minor amendments made to the first draft that was produced in evidence. In my view, those matters form an important part of the context within which the agreement is to be construed. The parties' objectives in making the agreement were limited and nascent. That is reflected in the apparent simplicity of the terms of the agreement.
Austpac's primary concern was to be relieved of the expenditure requirements attaching to EL 4521. It was to be provided with an opportunity to earn revenue from 'the Project' should it appear that exploitation of the WIM 150 deposit was viable. However, its possible participation in the Project was tentatively expressed in the Farm‑in Agreement.
First, negotiation and agreement over how the Project was to be developed during and following the bankable feasibility study stage was deferred until Australian Zircon elected to proceed to such a study. Although a 'more definitive agreement and joint venture arrangement' was to be negotiated at that time, Australian Zircon remained liable for the cost of the bankable feasibility study (and 'all costs associated with the Project Area').
Second, Austpac could elect on completion of the bankable feasibility study to participate through a 'contributing Interest' or to convert to a net profits interest 'net of all operating expenditure, debt service and sustaining capital'. It was only on completion of the bankable feasibility study that Austpac might be exposed to incurring expenditure on the Project Area and the Project and then, only if it chose to accept a participating interest after considering the study (and no doubt its then financial position, the continuing development of its technology and any other matter relevant to its commercial objectives).
In short, the Farm‑in Agreement contained sufficient detail to facilitate Austpac's objectives at the time that the agreement was made given that it was protected from further expenditure on EL 4521 for at least two years and six months following execution of the agreement and conceivably, for some further time. It could ultimately benefit from the exploitation of the WIM 150 deposit without cost if it chose.
Australian Zircon's objective at the time that the Farm‑in Agreement was made was expressed in recital 3 to the agreement: to assess the feasibility of exploiting the WIM 150 deposit. The Farm‑in Agreement provided a means for Australian Zircon to undertake that assessment at a modest cost ‑ a minimum of $200,000 plus the costs associated with the Project Area for at least six months after completion of the initial works program. Its obligation to incur further expenditure was subject to two decisions: first, to not give notice any time after completion of the initial work program and second, to proceed to a bankable feasibility study.
The term of the Farm-in Agreement
The term of the Farm-in Agreement was not specified and there is no evidence that the parties considered the matter in their negotiations other than indirectly by agreeing the trigger point for a more definitive agreement and joint venture arrangement. The effect of Australian Zircon's construction of the agreement is that Austpac remains bound and unable to dispose of EL4521 six years after the agreement was made. That may seem a commercially odd and possibly, unintended result given the parties' limited objectives.
However, the agreement must be interpreted as at the time that it was made and not by reference to subsequent events. Further, no issue was raised in the action concerning whether the Farm‑in Agreement was terminated through the passing of time or that it included any implied term as to time (for example, that Australian Zircon was to make its election on whether to proceed to a bankability feasibility study within a reasonable time).
Nevertheless, the parties' understanding of how long the agreement might remain in effect before it was replaced by a more definitive agreement and joint venture arrangement or came to an end is relevant to objectively ascertaining their intentions regarding the possibility of third party 'dealings'.
Evidence was elicited from Mr Clarke in cross‑examination about the time that might be required to investigate the WIM 150 deposit sufficiently to make an election on whether to proceed to a bankable feasibility study. There was some misunderstanding about precisely what he was being asked that clouded aspects of his evidence (see at ts 71). However, the effect of his evidence was that it was possible that Australian Zircon would have been in a position to decide whether to proceed with a bankable feasibility study on completing the work program specified in the schedule to the Farm‑in Agreement (ts 72). He indicated, however, that there was a significant amount of work required to be undertaken prior to making that decision. Further, Mr Clarke observed:
We're into the realms of difficulty here because even though the documents talk of going directly to a bankable feasibility study, it's industry standard to have a scoping study and then a pre‑feasibility study and then the bankable feasibility study. They do tend to meld one with another but what I'm at pains to emphasise is that there's quite a lot of work involved.
According to Mr Clarke it was common in Australia for those processes to take much longer than two years and could take 10 years or more (ts 72).
Mr Clarke referred to an industry standard in his evidence but as he observed, it was not clear that the parties intended to import that standard and the practices that he described into the Farm-in Agreement. Further, he agreed that his evidence reflected his personal experience in the resource industry 'but no more than that' (ts 72).
Mr Clarke has been involved in the resource industry for many years. However, he was not called as an expert witness and there was no evidence detailing the nature of his involvement in the industry. He did not purport to give evidence beyond his personal experience and there is no basis for drawing any inference from his evidence about the parties' expectations concerning the time that Australian Zircon might require to sufficiently investigate the WIM 150 deposit to allow an election on whether to proceed to a bankable feasibility study to be made.
Mr Turbott and Mr Allen were not examined about the matter. Consequently, the primary evidence of both parties' understanding of the work necessary to enable Australian Zircon to decide whether to proceed to a bankable feasibility study and the time that might be required to complete that work is to be found in the terms of the Farm‑in Agreement: the work program to be pursued in the first two years. Clause 1 of the agreement required Australian Zircon to complete that program at its costs and then provided that 'thereafter' it would 'bear all costs associated with the Project Area, through to the completion of a BFS'. The simplicity of that provision accommodated both the possibility that Australian Zircon would be ready to elect whether to proceed to a bankable feasibility study at the end of the work program period and the possibility that it was unable to make an election at that time. It was unnecessary for the parties to be more specific given their limited objectives. The inference is that they were content with the open-ended nature of this aspect of the Farm‑in Agreement.
As previously noted, the 'WIM 150 Summary Report' produced by Australian Zircon immediately prior to the Farm‑in Agreement stated that its strategy was to secure access to the WIM 150 deposit for 'minimal commitment over the next few years and to determine in that time whether the recovery benchmarks are achievable and warrant a feasibility study'. The report was sent to Mr Allen but there was no evidence on whether it was provided to Mr Turbott or that it accorded with his understanding or expectation.
An inference might be drawn from the fact that the agreed work program was only for two years. However, it is also open to infer that it was thought that it was unnecessary to agree a work program for the third year and beyond because the program could be decided by the management committee if required. Australian Zircon controlled the committee and presumably, it would have been expected to know what further work would be required to enable it to complete its investigations before making an election on whether to proceed to a bankable feasibility study.
In my view, the only finding that can be made about each party's understanding of how long the Farm-in Agreement might remain on foot is an inference to be drawn from the absence of any specific provision on the term of the agreement or for bringing the agreement to an end other than by Australian Zircon giving six months notice. That matter suggests that the parties did not consider that the Farm-in Agreement would remain on foot for so long that its term would be inconsistent with their limited purpose in making the agreement and their business objectives generally. There was no further evidence by which that inference could be given more precise content.
Austpac's technology
The technology developed by Austpac and the obligation imposed by cl 6 of the Farm‑in Agreement formed a part of Australian Zircon's case that the rights and obligations created by the agreement were incapable of being assigned or held on trust or that a term prohibiting dealings with the agreement should be implied (cl 6 was not, however, referred to in the particulars to par 8(a) of the statement of claim). The argument was illustrated by reference to the announcement of the Farm‑in Agreement made to the Stock Exchange (exhibit 7). The announcement was to the effect that the agreement represented an alliance drawing on the significant expertise of both parties ‑ Australian Zircon's experience in the testing and design of processes for the recovery of relatively fine grain heavy mineral sands and Austpac's testing for the processing of WIM 150 ilmenite using its technology. It was said that the 'alliance' found its expression in the provisions of the Farm‑in Agreement:
(a)Australian Zircon was to be the operator in respect of the Project Area and was to undertake and pay for the initial work program and was obliged generally to expend on the Project Area at least the amount required to maintain the title to the Project Area in good standing and otherwise in accordance with the detailed work programs and budgets approved by the management committee (which was to be controlled by Australian Zircon).
(b)Australian Zircon was to ensure that Austpac's ERMS and EARS technologies were investigated for the processing of any titanium minerals from the Project Area as part of any work program and budget and feasibility study (cl 6 of the Farm-in Agreement).
However, I have found that both parties knew that the processes developed by Austpac could only be used for treating ilmenite and had no application to the treatment of other heavy mineral sands that might be found within the WIM 150 deposit and in particular, zircon. Although Mr Clarke stated that the viability of mining of the WIM 150 deposit would be assessed by reference to all mineralisation found within the deposit, Australian Zircon's primary interest was in the deposit as a zircon resource.
There was little further evidence about the significance of Austpac's ilmenite processing technology and the obligation imposed on Australian Zircon by cl 6 of the Farm‑in Agreement:
(a)there was no evidence that Australian Zircon possessed any specialist knowledge about the processing of ilmenite or any other particular expertise that would enable it to conduct the investigation required by cl 6;
(b)there was no evidence that the parties discussed what investigations might be undertaken pursuant to cl 6 (the investigation may have been, for instance, geological, financial or technical);
(c)there was also no evidence that the parties discussed the capacity of Australian Zircon to perform the investigations contemplated by cl 6 prior to the Farm‑in Agreement being concluded;
(d)the evidence also did not establish that Australian Zircon's 'experience in the treating and design of processing for the recovery of relatively fine grained heavy mineral sands' to which the announcement to the Stock Exchange referred gave it a particular advantage in performing the investigations contemplated by cl 6 of the Farm‑in Agreement (assuming that the investigation was to have a technical aspect).
In my view, Australian Zircon has not established on the evidence that the obligation that it assumed under cl 6 was personal in the sense alleged in par 7 of its statement of claim (the test of what constitutes a non‑assignable personal obligation is considered later in these reasons). I also consider that the clause does not assist Australian Zircon to establish that the rights and obligations contained in the Farm‑in Agreement taken together mark the agreement as a personal contract.
Interdependent rights and obligations
Australian Zircon contended that cl 1 to cl 6 of the Farm‑in Agreement contained 'interlinked and interdependent' rights and obligations:
(a)Clause 1 to cl 3 were interlinked and interdependent in that Australian Zircon agreed to undertake work and complete the bankable feasibility study and Austpac agreed that, in return, Australian Zircon would be entitled to at least an 80% interest in the Project and at Austpac's election, a 100% interest.
(b)Clause 4 obliged Austpac to ensure that EL 4521 was maintained in good standing and Australian Zircon was required to provide all necessary reports on the work undertaken to enable Austpac to meet its obligation.
(c)Clause 5 required the parties to form a management committee. Australian Zircon was to report to the committee quarterly as the operator in respect of the Project Area. Further, Australian Zircon was required to spend on the Project Area sufficient amounts to meet the expenditure requirements for EL 4521.
(d)Clause 6 required Australian Zircon to make appropriate investigations of Austpac's technologies.
It was submitted that the interdependent nature of the rights and obligations created by those clauses meant that they could not be severed by an assignment without the non-assigning party's consent. That was because inherent in any right purportedly assigned was an obligation. The right did not merely represent the benefit of a corresponding but separate obligation; rather, the right carried with it an inseparable obligation. Consequently, the right could not be assigned without the obligation and the obligation could not be assigned except by consent (that is, by a novation).
The principle relied on by Australian Zircon was said to be reflected in the judgment of Rares J at first instance in Goodridge v Macquarie Bank Ltd [2010] FCA 67; (2010) 265 ALR 170. At [199] ‑ [200], his Honour stated:
I am of opinion that the Bank cannot have disposed, once for all, of its rights and power to determine, independently of Leveraged Equities or X, whether or not it was obliged to lend Mr Goodridge more money ... such 'rights' or, rather powers and duties, are not capable of assignment because they were inherent and necessary to both the bank's rights and its obligations under the whole loan and security agreement, ie the 'rights' or powers and duties not just in the enforcement of the borrower's debt, but in the creation of further debts.
In my opinion there cannot be a separation of the Bank's existing legal right to a debt and supporting security owed by Mr Goodridge from its continuing obligation to lend to him and to assist his acquisition of further securities on the same terms and conditions. This was not simply an assignment of a debt free standing from an ongoing relationship between the assignor and debtor. The Bank and Leveraged Equities were seeking to assign pieces of the relationship to give effect to a commercial objective. But the mechanism that they chose could not assign what the Bank and Mr Goodridge had agreed would be the criteria and use of powers on which the Bank would be bound to lend him more money. That part of the loan and security agreement was inseverable from the obligation of the Bank to lend on the terms of that agreement.
Australian Zircon also emphasised in this context that the Farm‑in Agreement contemplated that the parties would in the future continue their relationship through a more definitive agreement and joint venture arrangement. That relationship was defined by the subject matter and the terms of their agreement ‑ a farm‑in agreement in respect of a project to investigate and if thought viable, exploit a mineral deposit and the intention expressed in cl 9 that the project would be developed as a 'joint venture arrangement' if it proceeded to a bankable feasibility study.
On appeal, the Full Federal Court rejected the conclusion reached by Rares J: Leveraged Equities Ltd v Goodridge [2011] FCAFC 3; (2011) 274 ALR 655. However, I do not read the decision of Jacobson J (with whom Finkelstein and Stone JJ agreed) as denying the possibility that on its proper construction, a contract might contain rights and obligations that are so interdependent that they are incapable of assignment in the same way that rights and obligations may be characterised as being too personal to permit assignment or vicarious performance. Jacobson J referred to the conclusion reached by Rares J as being contrary to principles that ought to have been applied [375]. However, those principles concerned the paramountcy of an express provision of the contract permitting assignment and the possibility that the benefit of some obligations under a contract may be assignable while others under the same contract may not be assigned (see especially at [357], [363] ‑ [365] and [372]). Further, his Honour took a different view of the proper construction of the relevant provisions of the contract in issue (see at [367] ‑ [369] and [371]). Those differences culminated in him holding that, 'contrary to [Rares J's] views, there seems to me to be a sufficiently clear division between the rights of Leveraged Equities and the continuing obligations of Macquarie in the relevant Transaction Documents' [378].
However, in my view, the rights and obligations created by cl 1 to cl 6 of the Farm‑in Agreement were not interdependent in the sense contended for by Australian Zircon. To adopt what was said by Jacobson J in Leveraged Equities, the clauses exhibited a clear division between the rights of Australian Zircon and the continuing obligations of Austpac and vice versa. The terms relied on by Australian Zircon merely created rights and obligations that were mutual in the sense that the enjoyment of a right by one party was dependent on the performance of a corresponding obligation by the other party. That is the essence of a contract. It does not mean that the benefit of the obligations imposed by cl 1 to cl 6 were of such a character that they were inherently incapable of being assigned; that the rights were so intertwined with the obligations that they could not be severed by assignment so that Austpac would be unable to discharge its obligations under the Farm-in Agreement if the benefit of the agreement was transfered.
For example, Australian Zircon's right to earn an interest in the Project was dependent on Austpac maintaining EL 4521 in good standing but I can see no reason why Austpac could not assign its right to have work performed and money expended on the Project Area merely because of that obligation. It could readily perform the obligation following assignment. Similarly, for cl 6 insofar as it impliedly contained an obligation imposed on Austpac (for instance, to provide sufficient information about its technologies to facilitate appropriate investigations). That was also an obligation that Austpac could perform notwithstanding the assignment of its rights under cl 1 to cl 6.
The position is less clear with the obligation imposed on Austpac by cl 5 to participate in the management committee. It would be commercially odd for Austpac to continue to participate in the management committee if it had transferred EL4521 as well as the benefit of the Farm-in Agreement; perhaps less so if it still held the licence. However, I do not consider that cl 5 creates an obligation that is interdependent in the relevant sense with the rights conferred by the Farm-in Agreement. The controlling vote of Australian Zircon is also relevant in this context.
The benefit derived from cl 3 of the Farm-in Agreement (the right to share in the exploitation of the Project Area through a participating interest or a net profit interest based on a bankable feasibility study completed by Australian Zircon at its expense) was to accrue if Australian Zircon elected to proceed to, and completed, a bankable feasibility study and after the parties had made a more definitive agreement and joint venture arrangement. The benefit was conditional on the performance of the entire agreement but it was not, in my view, interdependent in the sense being considered.
The same conclusion applies when the rights of Australian Zircon and the corresponding obligations of Austpac are examined.
Clause 9
Australian Zircon contended that cl 9 imposed an enforceable obligation on each party to negotiate a more definitive agreement and joint venture arrangement that was personal in nature. It relied on the judgment of Allsop P (with whom Ipp and MacFarlan JJA agreed) in United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177 to support the first part of that submission.
However, Buss JA stated the proposition that there can be a trust of a contract that is not assignable at law without qualification and he plainly accepted that the proposition was good law (as have other academic writers and the learned authors of leading texts on equity and contract). Martin CJ expressly agreed with his Honour's reasons. The decision of Lightman J in Don KingProductions was affirmed by the Court of Appeal and not doubted in Barbados Trust.
There are, however, suggestions that the proposition is confined to a trust over the benefit of the contract concerned; see generally Barbados Trust and Tolhurst states that (at [6.90]):
It has been held that a prohibition against assignment may not prevent the assignor from declaring itself a trustee of the benefit of the contract. Even where the contract involves personal skill and confidence, it has been said that a party may declare itself a trustee of the fruits for the benefit of a third party and arguably the benefit of the contract.
As Professor Turner has pointed out, it is not clear whether Lightman J in Don King Productions was referring to a trust over the rights created by the contract (the benefit of the contract or its product) or to a trust of the entire contract (its rights and obligations) when he referred to a trust over 'the agreements'. The Court of Appeal was referred to Professor Turner's article in Barbados Trust and their judgments focus on a possible trust over the benefit of a contract. However, their Lordships did not endeavour to resolve any ambiguity in the judgment in Don King Productions.
Those considerations indicate that further analysis and argument might suggest limitations to the broad statement of principle accepted by Buss JA in Secure Parking. However, I consider that I am bound by what his Honour said to hold that the whole of the Farm-in Agreement could have been the subject of the declaration of trust made in cl 10.4 of the Sale Agreement. The citation of the judgment of Lord Shaw in Lord Strathcona immediately before the statement of the proposition that his Honour accepted was established by Don King Productions cannot be overlooked.
The result is that I would have been bound to have held that the declaration of trust in cl 10.4 of the Sale Agreement was effective regardless of how that agreement was to be construed but for the finding that cl 7 of the Farm‑in Agreement prohibited the declaration.
I would have been inclined to accept the submissions by counsel for Australian Zircon that there could only be a declaration of trust over the product of the performance of a contract or the benefit of the contract had I not concluded that I was bound by Secure Parking to find that there could be a trust over the entire contract. The effect of the declaration of trust in the Sale Agreement would then depend on the proper construction of cl 7 of the Farm‑in Agreement (whether it prohibited the declaration of trust) and cl 10.4, read with 10.1, of the Sale Agreement (whether the intended trust property was the entire Farm-in Agreement or only the benefit of the agreement).
The declaration claimed by Austpac
There is no reason why the court should not exercise its discretion to make a declaration in the terms sought by Austpac that the Sale Agreement is frustrated and at an end.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: AUSTRALIAN ZIRCON NL -v- AUSTPAC RESOURCES NL [No 2] [2011] WASC 186 (S)
CORAM: CORBOY J
HEARD: 13 & 14 DECEMBER 2010, 4, 15 & 29 AUGUST 2011 AND ON THE PAPERS
DELIVERED : 4 AUGUST 2011
SUPPLEMENTARY
DECISION :10 JANUARY 2012
FILE NO/S: CIV 1600 of 2010
BETWEEN: AUSTRALIAN ZIRCON NL
Plaintiff
AND
AUSTPAC RESOURCES NL
First DefendantASTRON LIMITED
Second DefendantWIM 150 PTY LTD
Third Defendant(BY ORIGINAL ACTION)
AUSTPAC RESOURCES NL
PlaintiffAND
AUSTRALIAN ZIRCON NL
First DefendantASTRON LIMITED
Second DefendantWIM 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
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
Rayner v Australia and New Zealand Banking Group Ltd [2003] WASCA 264
Rumball v Mortimore [2000] WASC 126
CORBOY J:
The application and the result
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.
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.
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 they considered should be made as between them. These reasons concern those submissions.
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.
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.
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.
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.
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.
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
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
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
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'.
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.
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.
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
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.
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.
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:
(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.
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?
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.
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
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.
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.
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.
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).
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.
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.
(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.
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.
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
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.
Key Legal Topics
Areas of Law
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Contract Law
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Trusts & Equity
Legal Concepts
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Contract Formation
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Trusts
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Breach of Contract
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Specific Performance
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Unjust Enrichment
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