Golden Sands Pty Ltd v Excell Quarries Pty Ltd

IN THE SUPREME COURT OF VICTORIA	Not Restricted
AT MELBOURNE COMMERCIAL AND EQUITY DIVISION

No. 6875 of 2005

GOLDEN SANDS PTY LTD	Plaintiff
(ACN 096 491 913)
v
EXCEL QUARRIES PTY LTD	Defendants
(ACN 010 056 407)
and
DARRA EXPLORATION PTY LTD (ACN 009 800 355)

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JUDGE:	WHELAN J
WHERE HELD:	Melbourne
DATE OF HEARING:	16 and 20 November 2006
DATE OF RULING:	24 November 2006
CASE MAY BE CITED AS:	Golden Sands Pty Ltd v Excel Quarries Pty Ltd
MEDIUM NEUTRAL CITATION:	[2006] VSC 454

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INTERLOCUTORY APPLICATION – interlocutory order sought during trial pending conclusion of trial after adjournment – analysis of the course that has the lower risk of injustice if it turns out to be wrong – application granted – order made requiring resumption of minimum royalty payments.

Bradto v State of Victoria [2006] VSCA 89

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Ms K. McMillan SC with Mr	Piper Alderman
D. Clough
For the Defendant	Mr P. Bick QC with Mr M.	Cornwall Stoddart
Osborne
CRS WORDWAVE PTY LTD – A MERRILL COMPANY	9602 1799	0
3/221 Queen Street Street, Melbourne
SC:AP
HIS HONOUR:

By a Royalty Agreement dated 21 December 2001, the plaintiff (“Golden Sands”) was granted the right to extract sand from a quarry at 555 Sandy Creek Road, Lara (“the Darra site”) and to use the Production Facilities (as defined) on that site. The first defendant (“Excel”) and the second defendant (“Darra Exploration”) are also parties to that Royalty Agreement.
In this proceeding Golden Sands seeks to recover damages from Excel and Darra Exploration. It makes a variety of claims which may be summarised as follows. First, it alleges Excel and Darra Exploration engaged in misleading conduct by virtue of their failure to inform Golden Sands of certain defects in items of plant and equipment forming part of the Production Facilities (as defined). The defects concerned are in equipment referred to as "the stacker" and the "de-watering assembly". Secondly, it alleges Excel and Darra Exploration are in breach of certain express warranties in the Royalty Agreement by virtue of the same defects. Thirdly, it alleges Excel and Darra Exploration are in breach of implied warranties in the Royalty Agreement by virtue of the same defects. There are other claims made but those are the principal ones.
Excel and Darra Exploration deny liability. They have counter-claimed for royalties due under the Royalty Agreement and for instalments due under a related equipment sale agreement. Golden Sands admits the royalties claimed are as provided for by the Royalty Agreement and admits they have not been paid. It relies upon its own claims against Excel and Darra Exploration in denying any sum is due. It alleges an implied term of the equipment sale agreement concerning the structural soundness of the plant and equipment which was the subject of the Royalty Agreement.
The proceeding was fixed for trial on 1 November 2006 with ten sitting days allocated to it. I had made it clear that no additional time could, or would, be available. I had misgivings as to the duration of the hearing but was persuaded that it could be dealt with within that time, principally by counsel for Excel and Darra Exploration.
The trial commenced on 1 November 2006. At the conclusion of ten sitting days, on 20 November 2006, Golden Sands's case had closed and counsel for Excel and Darra Exploration had opened their case. No evidence had yet been called by the defendants. They have filed witness statements from 11 witnesses. My own assessment is that the case is approximately halfway through. Due to other commitments I cannot resume the trial for a period of several months, at the least. I had repeatedly warned the parties of this position.
On 15 November 2006, it having become apparent that the trial would not conclude within the time allocated and that a substantial adjournment would then occur, the defendants issued a summons seeking the following order: "That until the determination of this proceeding, or further order, the Plaintiff whether by itself, its servants or agents or howsoever otherwise be restrained from:

(a) entering upon the land and sand extraction operations at 555 Sandy Creek Road, Lara in the State of Victoria (“the Darra site”);
(b) retaining or using any item of equipment referred to in the equipment sale agreement dated 9 July 2002 made between the Plaintiff and the First Defendant;
(c) retaining or using any item constituting part of the Production Facilities (as that term is defined in the Royalty Agreement dated 21 December 2001 (“the Royalty Agreement”);
unless the Plaintiff pays to the First Defendant on the 28th day of each month commencing 28 November 2006, the sum of $41,800 (being the amount of the minimum royalty payment referred to in clause 4.5 of the Royalty Agreement)."

Counsel for Excel and Darra Exploration made submissions on the interlocutory application during the course of the opening of the defendants’ case on Thursday 16 November 2006. The submissions relied upon the evidence given in the course of Golden Sands's case. Counsel for Golden Sands responded briefly on that same day and put forward an alternative proposal in these terms:

1. The defendants pay for the re-instatement of the stacker and the dewatering assembly forthwith.
2. The plaintiff pay for the re-instatement of all other items required to be repaired to make the sand wash plant on the Darra site operational forthwith.
3. Pending the re-instatement of the Darra site to an operational state, the plaintiff to pay royalties on the sand sold from the Darra site.
4. Once the Darra site is operational, the plaintiff pay royalties on the sand sold from the Darra site.
5. Once the minimum royalty amount is reached, then royalties are paid as per the Royalty Agreement.
6. The plaintiff continues to use the equipment the subject of the equipment sale agreement.
7. The defendants provide the bulldozer to the plaintiff for the following year as per the Royalty Agreement and in the event that the bulldozer is not so provided, the defendants reimburse the plaintiff for the costs of the hire of a bulldozer.

Counsel for Golden Sands responded to the application more fully on Monday 20 November 2006. On that day Golden Sands relied upon further affidavit material prepared between 16 November and 20 November, being an affidavit of Golden Sands’s solicitor, Andrew William Tilley Stops, sworn 20 November 2006, and an affidavit of Peter John Wilson, Golden Sands’s business manager, sworn 20 November 2006. Golden Sands also relied upon two reports by Golden Sands’s forensic accountant, who had already given evidence in the case, Mr Joe Dicks. The first report is dated 17 November 2006 and was tendered as Exhibit A on the interlocutory application. The second report is dated 20 November 2006 and was tendered as Exhibit B.
The submissions of the parties on the interlocutory application, particularly those on behalf of the defendants, canvassed the issues in the proceeding at some length. Given that I am part-heard in the trial, it is not desirable that I express any conclusions on these issues, save for the following:

1. There is a serious question to be tried on Golden Sands's claims.
2. Each of the following outcomes is open on the current state of the evidence:
(i) Golden Sands may fail in all its claims.
(ii) Golden Sands may succeed but recover less damages than the amounts already outstanding under the Royalty Agreement and equipment sale agreement.

(iii) Golden Sands may succeed and recover more than the said
amounts presently outstanding.

The Royalty Agreement governs the mining of sand and the use of plant and equipment on the Darra site. Golden Sands also mines sand and operates a processing plant on an adjacent site, referred to as the Davegale site. The history of these joint operations is complex and it is unnecessary to go into it for the purposes of this application. For present purposes it suffices to say that the Royalty Agreement provides for the payment of royalties in accordance with a specified formula on all sand sourced in full or in part from either the Darra site or the Davegale site.
The Royalty Agreement provides for an overriding obligation to pay each year not less than the royalty based upon a yearly tonnage of not less than 300,000 tonnes. Provision is made for monthly payments on the 28th day of each month.
Golden Sands has paid no royalties since April 2004. As at 28 October 2006 the defendants calculate the amount outstanding as $1,169,850 before interest. A further $98,270 is outstanding under the equipment sale agreement. The minimum monthly royalty payment calculated in accordance with the royalty agreement is now said by the defendants to be $41,800 per month. These figures were not contested by Golden Sands.
Golden Sands maintains the breaches of warranty of which it complains have resulted in very substantial loss of production. It now principally relies upon a processing plant which it has built on the Davegale site. It has continued to mine sand on the Darra site and it intends to continue to do so. In particular, it has mined on Darra, and it intends to continue to mine, sand sold as unwashed packing sand at a rate of approximately 100,000 tonnes per annum producing revenue of approximately $1 million per annum.
Mr William Wilson is a director of Golden Sands. He is a man of very extensive experience and expertise in the sand mining industry. According to his evidence (Exhibit P2, paragraph 150), and according to an affidavit he swore in this proceeding on 3 October 2006 (paragraphs 41-44) which was relied upon by the defendants in this application, Mr Wilson anticipates that washed sand sales from the Davegale site will exceed 20,000 tonnes per month by December 2006. That would mean that the total sand sales from both sites on an annualised basis would then be approximately 340,000 tonnes, well in excess of the minimum royalty tonnage.
Mr Dicks has also addressed the issue of Golden Sands's current sand sales. He has reviewed Golden Sands product delivery reports for July 2006 to October 2006 and has analysed them in his report which is Exhibit B. Annualising those figures indicates that Golden Sands production in 2006-2007 will equate to approximately 234,000 tonnes. This is not necessarily inconsistent with Mr Wilson's evidence, as Mr Wilson has explained that the capacity of the Davegale plant has been increasing over the course of 2006.
Mr Dicks has also calculated what level of sales Golden Sands would need to generate to pay the minimum annual royalty and still meet all of its other expenses, including the directors’ consultancy fees and the salaries of family members of the directors who are employees.[1] The tonnage so calculated is 236,883 tonnes. Thus, to pay a full year's minimum royalty (approximately $440,000) Mr Dicks calculates Golden Sands would need to generate annual sales tonnage of 236,883 tonnes. His annualising of the July to October actual figures produces an annual sales tonnage of 234,000 tonnes. Mr Wilson's evidence suggests Golden Sands should exceed Mr Dicks's projection.
[1] For the purposes of this exercise Mr Dicks made a number of adjustments to Golden Sands’s 2005/2006 MYOB accounts. One adjustment was to add back the legal costs of this proceeding. No issue was taken with this approach by any party in the interlocutory application.
Excel and Darra Exploration are related companies of two substantial companies named Hanson Australia Pty Limited and Rinker Group Limited. Material exhibited to Mr Stops’s affidavit reveals that Rinker Group Limited has net assets in excess of US$2.6 billion. Counsel for Excel and Darra Exploration has proffered the usual undertaking as to damages by those two companies and has proffered the same undertaking by Hanson Australia Pty Limited and Rinker Group Limited.
Golden Sands is a much smaller enterprise. Its financial statements are in evidence. On the basis of those financial statements and the material concerning the 2005/2006 year produced in Mr Peter Wilson's affidavit, it seems that if Golden Sands fails in this proceeding it will be unable to meet the arrears of royalties already due from its own resources. Golden Sands in the course of submissions on the interlocutory application did not contest this conclusion (see Transcript 1006). As to the current Golden Sands production and sales calculations, counsel for Golden Sands submitted that whilst Golden Sands may reach the minimum tonnage levels in the near future, given the problems with the Darra plant, it will only do so in a manner which is less efficient and more costly than ought to have been the case.
The approach to be taken on interlocutory injunction applications, particularly those with a mandatory element, has been recently reviewed by the Court of Appeal in Bradto v State of Victoria [2006] VSCA 89. At paragraph 35 the Court said:
“In our view, the flexibility and adaptability of the remedy of injunction as an instrument of justice will be best served by the adoption of the Hoffman approach. That is, whether the relief sought is prohibitory or mandatory, the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been ‘wrong’, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial.”
Turning then to the competing interlocutory positions contended for by the parties and applying the principles in Bradto, it seems to me to be clear that I cannot accede to Golden Sands’s proposal. That proposal requires Golden Sands to resume paying royalties only once the defendants have paid for the reinstatement of the stacker and the de-watering assembly, and even then subject to other conditions. That arrangement would impose a financial obligation on the defendants which they deny they have in circumstances where, if they succeed, they will not be able to recover, or there is a substantial risk they will not be able to recover, the amount expended from Golden Sands. This is because in that eventuality it seems that Golden Sands will not be able to pay the amounts already due.
Further, the proposal would, it seems to me, require constant monitoring and is very likely to produce a new round of claims and counter-claims. This is obviously very undesirable in the current circumstances.
As to the Excel and Darra Exploration proposal, it seems to me that the justice of the case requires a resumption of royalty payments by Golden Sands.
I have reached this conclusion for the following reasons:

1.

Mr William Wilson's evidence is that Golden Sands will by December of this year be selling sand at a rate in excess of the minimum tonnage provided for in the Royalty Agreement.

2.

Even on Mr Dicks's more conservative calculations Golden Sands is already selling sand at a rate sufficient to meet the minimum monthly royalty and all of its other expenses (as adjusted by Mr Dicks). Mr Dicks's calculations address Golden Sands capacity to pay the annual minimum for the 2006/2007 year. If Golden Sands were to resume monthly payments now, it would only make eight such payments during that year. If it resumes payments in December, when Mr Williams predicts the minimum tonnage rate will be exceeded, it will only make seven payments. Mr Dicks calculates that Golden Sands’s present production rate is almost sufficient to meet the full annual payment. The tonnages may be being produced in a manner which is more costly than was anticipated, and less efficiently, as counsel for Golden Sands submitted, but the fact remains, as Mr Dicks has demonstrated, that Golden Sands can pay the minimum monthly royalty payments and still meet all of its other production expenses.

3.

If it should turn out to have been "wrong" to grant the injunction in the sense that Golden Sands establishes its right at trial and proves damages in excess of the approximate sum of $1.2 million already outstanding, there is no real doubt that it will be able to recover what it pays out as a consequence of the interlocutory order should it be entitled to do so, given the undertakings proffered. Further, given that the Royalty Agreement itself still has five years to run, the possibility of Golden Sands not recovering everything found due to it is remote.

4.

On the other hand, if it should turn out to have been "wrong" to fail to grant the injunction, in the sense that Excel and Darra Exploration succeed at trial, or Golden Sands succeeds but recovers less than the amount already outstanding, there is a very considerable risk that Excel and Darra Exploration will not recover the royalty payments which will fall due during the ensuing period before judgment, nor will they recover the value of the sand which will be mined and removed from the Darra site over that period.

I have considered the further alternative proposal contended for on behalf of Golden Sands, namely that Golden Sands only be required to resume paying royalties on sand extracted from the Darra site. I do not think such an approach would be just in the circumstances. It does not reflect the terms of the Royalty Agreement. It does not reflect any possible outcome in the proceeding. There would be potential problems in monitoring compliance. The royalty rate provided for in the Royalty Agreement applies across a range of products. The packing sand still being mined and sold from the Darra site is sold with little or no processing. It would not fairly balance the interests of the parties to merely require Golden Sands to pay the royalty rate provided for on only a portion of its total sales, that portion being the unwashed and largely unprocessed packing sand.
Neither party maintains in this proceeding that the Royalty Agreement has been terminated, although the defendants seek a declaration of their entitlement to terminate. Thus, all parties presently contend the Royalty Agreement remains on foot.
The conclusion I have reached is that Golden Sands should resume payments under the Royalty Agreement which are no less than the minimum monthly payments and that those payments should resume no later than 28 December 2006. I have chosen that date so as to reflect Mr William Wilson's evidence.
Golden Sands maintains full royalty payments should only resume when plants at both sites are operating. Counsel for Golden Sands contended the Royalty Agreement contemplates two plants to meet the minimum tonnage. I do not want to express any final conclusion as to what the Royalty Agreement contemplates. At this stage I am not persuaded that that is an accurate characterisation of the agreement’s terms. In any event, for the reasons given earlier, Golden Sands is secure in relation to recovery of any compensable losses it suffers due to defects in, or unavailability of, the plant.
I am concerned to ensure that the order I make should reflect as closely as possible the Royalty Agreement. I will hear the parties further on the terms of the order.
Orders made after further submissions:

1. Subject to any further order, and pending the final determination of the proceeding, Golden Sands Pty Ltd is to resume payments pursuant to clause 4 of the Royalty Agreement dated 21 December 2001, in amounts not less than the monthly sum of $41,800, commencing on 28 December 2006.
2. The costs of this application are costs in the cause.
3. The parties have liberty to apply on 24 hours written notice.]

[2006] VSC 454

24 November 2006