Pacific Power and Elcom Collieries Pty Ltd v Cumnock No 1 Colliery Pty Ltd, John Hodge, Helen Janice Dalton and Thomas James Johnson - [2001] NSWSC 1100

No judgment structure available for this case.

CITATION: Pacific Power & Elcom Collieries Pty Ltd v Cumnock No 1 Colliery Pty Ltd, John Hodge, Helen Janice Dalton & Thomas James Johnson [2001] NSWSC 1100

CURRENT JURISDICTION: Equity Division
Commercial List

FILE NUMBER(S): SC 50008/00

HEARING DATE(S): 3, 4, 5, 6, 7, 11, 12 & 13 September and 3 & 12 October 2001.

JUDGMENT DATE:
30 November 2001

PARTIES :

Pacific Power (First Plaintiff)
Elcom Collieries Pty Ltd (Second Plaintiff)
Cumnock No. 1 Colliery Pty Ltd (First Defendant)
John Hodge (Second Defendant)
Helen Janice Dalton (Third Defendant)
Thomas James Johnson (Fourth Defendant)

JUDGMENT OF: Bergin J

COUNSEL : JL Trew QC leading GR Waugh (Plaintiffs)
R Weber SC leading A Mountfort (Defendants)

SOLICITORS: Davis & Davis (Plaintiffs)
Mallesons Stephen Jaques (Defendants)

CATCHWORDS: [CONTRACT] Whether exchange of correspondence created an immediately binding contract - Intention of the parties to be bound by the agreement. - [GUARANTEE] Whether guarantors remained bound to perform the obligations under the guarantee in relation to the new agreement between the parties.

CASES CITED: Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61.
Creamoata Ltd v The Rice Equalisation Association Ltd (1953) 89 CLR 286.
Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500.
G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631.
Love & Stewart v S Instone & Co Ltd (1917) 33 TLR 475.
Masters v Cameron (1954) 91 CLR 353.
Pagnan SpA v Feed Products Ltd [1987] 2 Lloyds Rep 601.
Pobjie Agencies Pty Ltd v Vinidex Tudemakers Pty Ltd [2000] NSWCA 105.
Rossiter v Miller (1878) 3 App.Cas 1124
Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310.
Trade Indemnity Co Ltd v Workington Harbour and Dock Board [1937] AC 1
Westfarmers Bunnings Ltd v Angus & Robertson Bookworld Pty Ltd [1998] VSC 101

DECISION: Declaration in paragraph 1 of the Amended Summons; Order in paragraph 3 of the Amended Summons; Balance of the Amended Summons and Cross Claims are dismissed.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

30 NOVEMBER 2001
50008/2000 – PACIFIC POWER & ELCOM COLLIERIES PTY LTD v CUMNOCK NO 1 COLLIERY PTY LIMITED, JOHN HODGE, HELEN JANICE DALTON & THOMAS JAMES JOHNSON JUDGMENT

1 The plaintiff, Pacific Power, previously the Electricity Commission of New South Wales (ECNSW), was from approximately 1973, through its subsidiary the second plaintiff, Elcom Collieries Pty Limited (Elcom), the owner of the Liddell State Coal Mine (the Mine) located approximately 20 km to the south of Muswellbrook near Ravensworth in the Hunter Valley, New South Wales.

2 The first defendant, Cumnock No 1 Colliery Pty Ltd (Cumnock) previously known as Stocklyn Pty Ltd (Stocklyn), purchased the Mine in 1991 and, as Stocklyn, entered into a Royalty Deed with Elcom pursuant to which it agreed to pay royalties on certain coal won from the Mine. This litigation arises out of a dispute between the plaintiff and Cumnock as to whether an agreement was reached in 1994 that varied the Royalty Deed or whether a new agreement was entered into at that time in relation to the payment of royalties to the plaintiff. The plaintiff also claims alternatively that Cumnock is estopped from denying the existence of an agreement in 1994 to pay royalties to the plaintiff on certain coal won from the Mine. The claim against the second, third and fourth defendants is based upon their guarantees of Stocklyn’s performance of the Royalty Deed.

3 Cumnock denies that an agreement was reached in 1994 and by Cross Claim seeks repayment of what it claims was an overpayment of royalties to the plaintiff during the period September 1993 to February 1998. Cumnock claims that it "mistakenly" overpaid the royalties. The mistake pleaded is that Cumnock believed that the proposed amendments to the Royalty Deed would be finalised "and agreed to" and that it paid the royalties in that belief. It claims that as the proposed amendments were not finalised or agreed to such amounts that were paid are overpayments and should be repaid to Cumnock otherwise the plaintiff will be unjustly enriched. The second and third defendants, by cross claim, seek declarations and orders setting aside the guarantees.

The Sale of the Mine

4 The title to the Mine was consolidated in 1990 under Consolidated Lease No 739 (the Lease) and was registered on 23 February 1990. The term of the lease is to 10 March 2008. In September 1990 the ECNSW issued an Initial Information Memorandum (the Memorandum) in which it announced its intention to sell certain assets by public auction. Those assets were the Mine and part of the associated mining lease and freehold leases together with associated mining equipment, mine pit top facilities and washery, coal stocks and washery rejects, fuel spares and equipment stocks.

5 The Mine included a number of coal horizons of sufficient continuity to accord seam status in two formations. The first formation, the Burnawood formation, had within it six seams which were named Ravensworth, Bayswater, Unnamed 1, Unnamed 2, Unnamed 3 and Farrells Creek. The second formation, the Foybrook formation, contained 12 seams which were named Upper Davis Creek Split, Middle Davis Creek, Lower Davis Creek, Emu Creek, Pikes Gully Upper Split, Pikes Gully Lower Split, Arties, Upper Liddell, Middle Liddell, Lower Liddell, Barrett and Hebden.

6 The Memorandum described the Mine as "an underground coal mine with current longwall operations in the export coking coal quality Liddell Seam”. It also advised that the Barrett Seam had been developed and that "within the lease portion that is to be divested there is also the potential to develop two small opencut mining operations". In describing the history of the mining the Memorandum stated:

7 The Memorandum described the coal resources and listed the seams from which coal could be recovered as the Liddell Seam, the Barrett Seam and the Small Open Cuts. It noted that the reserves in the Small Open Cuts comprised coal from the Lower Davis Creek, Emu Creek and Pikes Gully Seams from two areas in the holding. The recoverable reserves were stated to be 6.2 Mt from the Liddell Seam, 35 Mt from the Barrett Seam and 14 Mt from the Small Open Cuts.

8 In describing the prospects for the domestic supply of coal the Memorandum referred to the coal supply agreement Elcom had with ECNSW to deliver 1.3 Mt of coal to Liddell Power Station over the year to 30 June 1991. The Memorandum stated that the "opportunity" would be made available to "secure a three year coal supply contract" with ECNSW commencing on 1 January 1991 for delivery of .8 million tonnes in the first year, .5 million tonnes in the second year and .3 million tonnes in the third year. Potential purchasers were advised that those who wished to take up the option should indicate that and the price of coal would be made available during the due diligence process.

9 By letter dated 31 May 1991 Cumnock submitted a conforming bid and a non-conforming bid linked to an alternative supply contract. It stated that its preference remained for a three to five year contract at higher tonnage to enable it to maintain employment and fully develop the potential of the Mine. The conforming bid consisted of a single cash payment of $7.6 million to be paid as to 10% upon signing the Share Sale Agreement and the balance upon settlement except that if ECNSW decided to excise the South Open Cut the price would be reduced by $2.6 million, the value placed on the South Open Cut by Cumnock, and the 10% recalculated. The conforming bid also included a coal supply contract at a base price of $30 per tonne (including Government royalty and excise) with escalation from 1 October 1990, with tonnages as specified over the three years and adjustments for ash, energy and moisture in accordance with a draft contract that had apparently been supplied.

10 The alternative offer, or non-conforming bid, consisted of a single cash payment totalling $5 million to be paid as to 10% upon signing the Share Sale Agreement with the balance upon completion and in addition "royalties on the Liddell and Barrett seams" on the assumption of the excision of the South Open Cut directly to the benefit of ECNSW. This bid provided a schedule outlining four alternative coal supply contract options one of which was to be selected by ECNSW as the basis of the offer. Cumnock advised that depending upon the option that was selected the base price "including Government royalty and excise will be between $29 and $30 per ROMT and the Liddell Seam royalty between 5% and 8% of the base price (excluding Government royalty and excise)". Cumnock also advised that escalation was based on 90% of the CPI movement adjusted quarterly in arrears.

11 The non-conforming bid contained the following offer in relation to royalties on the Liddell and Barrett Seams:

Liddell Seam Royalty
For Liddell Seam coal sold on a Run of Mine (ROM) basis to ECNSW the royalty is calculated at a rate of between 5% and 8% of the base price depending upon the coal supply option selected by the Commission (excluding Government royalty and excise).
For Liddell Seam Coal sold to any other customer, whether such coal be on a ROM or beneficiated basis, the royalty payable shall be calculated on the equivalent number of ROM tonnes multiplied by the base price (excluding Government royalty and excise). A royalty rate of 5% shall be used in calculating royalty payments on Liddell seam coal sold to parties other than the ECNSW.

Barrett Seam Royalty

12 Cumnock met with representatives of ECNSW on 28 June 1991 and, in response to a facsimile of 4 July 1991 from ECNSW, Cumnock wrote a letter on 10 July 1991 in which it stated that in relation to the offer it had made in the letter of 31 May 1991 "the royalty payable for the Liddell and Barrett Seams will be payable for the life of the respective reserves” and “no royalty is payable on the coal mined and sold from the South Open Cut area".

13 In September the sale of the Mine to Cumnock, as Stocklyn, was effected by a series of agreements (Ex. A) that included the Liddell Coal Titles Sale Agreement (the Sale Agreement), the Royalty Deed and the Personal Guarantees given by the second, third and fourth defendants. The amount payable by Cumnock excluding royalties was $7.6 million. The Sale Agreement included clause 3, Royalty Reservation, which provided that "the relevant royalty shall be payable on such terms and conditions as may from time to time be agreed" between the parties and "such continuing royalty interest" was not part of any interest that Cumnock was able to acquire under the Sale agreement or under the New Coal Lease. The Sale Agreement provided for the execution of the Royalty Deed on completion.

Coal Lease No 378

14 Cumnock was granted a new coal lease, Coal Lease No 378 (Lease 378), expiring on 10 March 2008. That Grant was gazetted on 8 November 1991 when notice was given that the Minister had on 25 October 1991 approved the transfer of that part of Coal Lease No 739 from Elcom to Stocklyn. Coal Lease No 739 was cancelled as to the area of that part that was transferred and Coal Lease No 378 was granted over that part transferred for a term until 10 March 2008.

The Royalty Deed

15 The Royalty Deed, the parties to which were Stocklyn, to which I shall refer as Cumnock, and Elcom, is dated 10 October 1991. Clause 2, Royalty Payments, contained a covenant by Cumnock to pay to Elcom (a) a royalty of 5% of the Royalty Price Per Tonne for each ROM tonne (or equivalent ROM tonnes where any Liddell Seam coal was sold on a non ROM basis) of Liddell Seam coal sold and delivered during each Royalty Period and (b) a royalty of $0.30 per tonne of each tonne of Barrett Seam coal sold and delivered during each Royalty Period. Cumnock was not required to pay royalty for Stockpiled Coal.

16 ROM was all coal produced by mining operation before any preparation was carried out and included all dilutions to such coal. The Royalty Period was a calendar month and the Royalty Price Per Tonne was in each Royalty Period, the Contract Price Per Tonne, which was the Base Price per tonne adjusted in accordance with the formula in Schedule one of the Royalty Deed, less government royalties and excise payable on the Liddell Seam Coal during that Royalty Period (Clause 1.1). Stockpiled Coal was the quantity of coal produced from Lease 739, owned by Elcom on the date of the Royalty Deed and stockpiled on or over the area covered by the title. Schedule one of the Royalty Deed provided a formula for the adjustment of the Base price per tonne.

17 The royalty payments were due and payable at any time prior to the expiry of the next succeeding calendar month (Clause 2.2). At the time of each payment Cumnock was obliged to provide to Elcom a Royalty Payment certificate signed by a Director or the Secretary of the company, setting out (a) the Contract Price Per Tonne and the Royalty Price Per Tonne for that Royalty Period, or calendar month, (b) the amount of government royalties and excise paid or payable on Liddell Seam coal sold during that period together with all receipts or invoices relating to such payments, (c) the number of tonnes of Liddell Seam Coal and Barrett Seam Coal sold and delivered during that Royalty Period and (d) the details of the purchaser of all such coal (clause 2.2). Clause 2.4 provided:

Increase of Barrett Seam Royalty

18 There was also provision for the payment of interest for non-payment of royalties within the specified period (clause 2.5). Cumnock was also obliged to provide to Elcom a copy of its annual royalty statement for coal won from the Mine on the same day that such statement was provided to the Department administering the Coal Mining Act of New South Wales (clause 2.6). It was also obliged to "keep and maintain proper plans, records and books of account in respect of all coal mining operations carried out" on the title that were "necessary in order for the amount of Royalty Payments in each Royalty Period to be calculated" (clause 4.1). Cumnock was also obliged to permit Elcom to inspect such records and "all other documents that relate to coal mining operations" on the title at all reasonable times. Elcom was entitled to have such records that related to the calculation of the Royalty Payments audited at its own cost (clause 4.2). If any inspection or audit of such records determined that any royalty payment had been calculated in error, the next royalty payment due was to be adjusted accordingly (clause 4.3).

19 The Royalty Deed was assignable by Elcom and any assignee was required to enter into an agreement under which it agreed to assume the obligations of Elcom under the Royalty Deed (clause 6). Clause 11, Amendment, provided "this Deed may not be amended except by a further deed executed by the parties”.

Coal Supply Contract

20 As part of the sale of the Mine Cumnock was granted a Coal Supply Contract, which has been referred to as Contract 4180, for a term of three years expiring on 5 November 1994. The letter from ECNSW to Cumnock dated 6 December 1991 accepted Cumnock's revised offer for the work broadly described as "short term coal supplies for Bayswater and Liddell Power Stations" at the rates set out in Cumnock's offer subject to adjustment in accordance with the offer. The Annual Contract Tonnage to be supplied by Cumnock to the Liddell and Bayswater Power Stations was one million tonnes in the first year 1991/1992, one million tonnes in the second year 1992/1993 and 800,000 tonnes in the third year 1993/1994 (clause 1.2.2).

21 Cumnock was required to provide security in the sum of $1,624,000 to be lodged within 28 days of 6 December 1991 (clause 8.4.4). The security was to be in the form of cash, bonds or inscribed stock issued by the Australian Government or the Government of a State or Territory of Australia, interest-bearing deposit in a trading bank carrying on business in Australia, an approved unconditional undertaking given by an approved financial institution or insurance company, or other form approved by ECNSW (clause 8.4.3).

Total consideration for purchase

22 On 8 November 1991 James Patrick Henness, who was then the Manager/Collieries and Fuel Contract of ECNSW, and later became Assistant General Manager in the Hunter Region of the plaintiff, wrote to the General Manager of ECNSW in relation to the total consideration from Cumnock for the purchase of the Mine. The memorandum advised that the acceptance of Cumnock’s offer had an estimation total net present value to ECNSW of $18.3 million. That estimate was based on revenue received over a 30 year period and was expressed in July 1991 terms. Mr Henness advised that the offer was made up of three components being (1) initial payment of $5 million on settlement, $2.4 million payable after 30 days and $0.2 million for Electricity Commission land, totalling $7.6 million (2) saving in coal purchases of $6.6 million and (3) royalties on coal sales to others of $2.5 million for Liddell Seam coal and $1.6 million for Barrett Seam Coal.

23 In describing the savings in coal purchases Mr Henness’ memorandum stated

24 Mr Henness noted that Cumnock would be paying the Commission specified royalties on coal mined and sold to parties other than the Commission. He advised that it was expected that the Liddell Seam coal would be mined first and probably within 5 years with a maximum net present value of the revenue estimated to be $2.5 million. Mr Henness also advised that the Barrett Seam, if it was mined, would provide royalties over a period of about 25 years, however, he noted that production may not commence for about four to five years and that the royalty rate was low. He drew attention to the “reality” that the Commission “should not count on the Barrett Seam Royalties due to the uncertainty surrounding the economic viability of mining that seam”. He referred to the first two components, being the initial payment of $7.6 million and savings in coal purchases of $6.6 million, as being “secured under the sales documentation and the Coal Supply Contract”. He also referred to a reasonable expectation that export sales of Liddell Seam coal could be achieved because of the past marketability as a semi/soft coking coal.

Assignment from Elcom to ECNSW

25 On 21 May 1993 Elcom, as assignor, assigned to ECNSW, as assignee, all its right title and interest under the agreements, guarantees and deeds for the sale of the Mine, referred to as the “contract” in the Deed of Assignment, in consideration of a payment by ECNSW to Elcom of $18.3 million.

Cumnock’s Operation of the Mine

26 From 1991 Cumnock mined coal from the Mine using three methods. The first two methods were development and longwall mining, which were conducted underground. The third method was open cut mining using the truck and shovel method. Cumnock had multiple weightometers including on the Barrett Seam Conveyors, the Liddell Seam Conveyors, the Pikes Gully Seam Conveyors, the M24 Series Conveyors (used to record 4180 tonnages), and further conveyors on the coal preparation plant. Records from all those weightometers were collected by the afternoon or nightshift, known as the backshift, storeman and passed on to Mr Blackburn, the Commercial Manager of Cumnock, or his staff by telephone or by leaving a handwritten note in the colliery office recording the tonnage from the previous days production. The reading of weightometers was taken on a daily basis as close to 11pm as possible.

27 When the readings from weightometers were received either Mr Blackburn or one of his staff under his supervision entered the figures in what was known as the monthly production schedule. The record keeping system also included a production history schedule that recorded the totals from the monthly production schedules on a monthly basis so that an historical record of the tonnages of coal from Cumnock’s various mines were available.

28 In the period January 1992 to May 1994 development of the Barrett Seam was carried out and measurement of tonnes removed from the seam by that method was concurrently recorded by means of a weightometer in the Mine located on the conveyor dedicated to that seam. That information was then recorded by Mr Blackburn or his staff on Cumnock’s monthly production records. No underground mining of the Barrett Seam has taken place since May 1994.

29 Coal was also mined from the Liddell Seam using both the development and longwall mining methods during the period November 1991 through to June 1993. Measurement of tonnes of coal removed from the Liddell Seam was concurrently recorded by means of a weightometer in the Mine located on the conveyor dedicated to that seam and was then recorded on Cumnock’s monthly production schedule. No underground mining of the Liddell Seam has taken place since June 1993.

30 The No.1 Open Cut was developed to supplement coal supply from underground operations so as to maintain continuity of supply during down times such as the removal and re-installation of longwall equipment. Mr Johnson gave evidence that from the time of development of this operation the addition of coal supplied from the seams other than Liddell and Barrett made it difficult to separate coal in relation to royalties paid pursuant to the Royalty Deed. Mr Johnson was of the view that this problem would be further exacerbated by plans to commence mining of the South Open Cut.

31 In early 1994 Cumnock commenced mining the Pikes Gully Seam from high-wall on the No.1 Open Cut with a view to developing longwall operations. In order to do that it modified equipment and purchased equipment that was specially designed to mine the lowest seam height. After obtaining approval from the Singleton Shire Council to develop the South Open Cut removal commenced in January 1994.

32 Mr Blackburn said that he was aware that a “practical difficulty” arose concerning the keeping of records of tonnages of coal produced from each of the seams from the South Open Cut. Those seams were Lower Pikes Gully, Upper Pikes Gully, Arties, Upper Middle Liddell, Lower Liddell and the Barrett Seams. Mr Blackburn understood that the difficulty arose because coal from the South Open Cut was not weighed. The sub-contractor would count the number of truck movements and multiply that by the weight held by each individual truck. The sub-contractor would tell Mr Blackburn or his staff of the tonnage of coal mined and the seams from which it was taken. The sub-contractor was required to report the seam from which the coal had been extracted during this period as a result of the fact that he was paid different rates for coal mined from the Barrett seam than for coal mined from other seams.

33 During the period February 1994 to June 1994 the sub-contractor did not differentiate between coal extracted from the different seams. Mr Blackburn said that the primary seam being mined from the South Open Cut at the time was the Liddell Seam, being the top seam within the relevant area, and the vast majority, 99% of the coal mined had been recorded as coming from the Liddell seam. There were small quantities 1%, also extracted from the Arties Seam and the Lower Pikes Gully Seam.

34 From August 1994 until June 1996 Mr Blackburn claimed that daily tonnages of coal produced by seam from the South Open Cut were recorded and kept by him and his staff. These were recorded once again by the method in which the sub-contractor telephoned the information to Mr Blackburn or his staff on a daily basis.

35 In July 1996 Cumnock no longer paid its sub-contractor different amounts for coal from different seams and as a consequence the sub-contractor only informed Mr Blackburn or his staff of the calculation of the weight of coal extracted and not the seam from which it came. The tonnages were recorded in the monthly production records and as a result the production history for the period August 1996 to June 1997 were not keep on a seam by seam basis.

36 Mr Johnson gave evidence that as a result of Cumnock’s open cut mining operations it became difficult to always accurately identify from which different seam coal was being mined as four different seams were located one beneath the other in the South Opencut. Coal from different seams was also being washed and processed together, which added to the difficulties in identifying the source of the coal. It was necessary to be able to identify from what seam the coal came so that Cumnock could calculate what royalties were due pursuant to the Royalty Deed. Additionally Cumnock also started to market its coal internationally and to develop international markets.

Disclosure of “Purchase Price”

37 In late 1992, prior to 16 November 1992, Mr Johnson and Mr Henness had a conversation in which Mr Henness informed Mr Johnson that there was a need to discuss the purchase price paid by Cumnock for the Mine. He informed Mr Johnson that he was under pressure from the State Parliament to disclose the value of the purchase and itemise the value attributed to the various components. Mr Johnson informed Mr Henness that he was of the view that the figures and the breakdown should not be disclosed as it could upset unions and other interested parties particularly given “the low cash component of the bid”.

38 Mr Henness informed Mr Johnson that he had estimated that the sale had a total value, including benefits to Elcom, of $18.3million and asked him whether that concurred with his valuation. Mr Johnson informed Mr Henness that it was “close” and that it was “a couple of hundred thousand less than my valuation”. Mr Johnson claimed that Mr Henness said that his breakdown of the amount was $7.6million for the sale of land, information and assets, $9.1million for Liddell Coal, including the benefit of cheaper coal pursuant C4180 and $1.6 for Barrett Coal.

39 In a subsequent telephone conversation between Mr Johnson and Mr Henness, the latter said that he would like to publish the value of Cumnock’s purchase of the Mine as the plaintiff was under pressure to publish the breakdown of the amount. Mr Johnson informed Mr Henness that he could release the total but not the breakdown. On 16 November 1992 an article appeared in the Newcastle Herald with the headline “$18.3m sale price announced for Liddel State mine”. The article reported that a spokesman for the plaintiff has declined to explain how the $18.3 million offer was comprised and had stated only that the price was between the valuations provided independently by two merchant banks.

40 On about 9 December 1992 Mr Johnson and Mr Henness had a further telephone conversation in which Mr Henness informed Mr Johnson that he was still under pressure from Parliament to release the breakdown of the price details for the sale of the Mine. Mr Johnson informed Mr Henness that he did not want the figures released as they were “confidential and commercially sensitive”. Mr Henness requested Mr Johnson to forward him a letter to that effect. In a letter dated 10 December 1992 Mr Johnson informed the plaintiff that Cumnock regarded the information as “highly confidential and commercially sensitive and that Cumnock’s future competitive position may be seriously jeopardised if such information were to be released”. The letter concluded by stating that Cumnock was not prepared to authorise release of any structured price arrangements and that the publicised sale price of $18.3million is “correct and according to your advice was independently audited”.

1993 Negotiations

41 Cumnock delivered the coal pursuant to contract 4180 and by 1993 the plaintiff had, large quantities of coal stockpiled. As a consequence the plaintiff made a decision that it would not seek further tenders for the supply of coal at the expiry of the term of contract 4180 at the end of November 1994.

42 On 17 March 1993 at the request of Cumnock’s then Managing Director, Mr Johnson, Mr Henness had a meeting with Mr Johnson at the plaintiff’s premises. Also present at the meeting was Mr Norman Lynch, the Fuel Contracts Manager for the Hunter Business Unit of the plaintiff. At this meeting Mr Johnson informed Mr Henness that Cumnock “would like to extend deliveries under the contract to June 1996”. Mr Henness gave evidence that he asked Mr Johnson to put the proposal in writing and that he said the plaintiff would have a look at it but that “we would need to ensure we will recover the sale value of the Mine at the least. We’d also need to be compensated for any additional risk we are taking on”. Mr Johnson’s evidence was that Mr Henness said “I want to ensure that we recover what we have on our books as being the value of the mine” or “we need to ensure we get our money back on the Liddell Mine and we need to recover an amount equivalent to that recorded on the books”.

43 On 21 May 1993 Mr Johnson wrote to the plaintiff in relation to a “Variation of Coal Supply Contract No.4180”. The letter confirmed “Cumnock’s agreement in principle to your offer of variation of Coal Supply Contract No.4180” to “extend the existing contracted coal supplies deliveries to June 1996” which he stated was “acceptable to Cumnock”. The letter continued:

In consideration of these arrangements which provide assistance to Pacific Power in both reducing and handling of stockpile levels, Cumnock requests the following:

1. That tonnage delivered in any month be a maximum of 60,000 tonnes at the option of Cumnock with thirty days prior notice as to anticipated actual deliveries. Fluctuation in the delivery schedule from an average of 30,000 tonnes per month will be influenced by the continuity of deliveries under our growing export arrangements.

2. That the balance of the total tonnage of 2.8 million tonnes due under the contract remains fully deliverable up until June 30th 1996 without variation or shortfall provisions relating to quota periods.

3. That the financial coal supply guarantee be varied to reflect the remaining tonnage due for delivery under the extended contract period.

4. That the Export Royalty Deed be varied to equal $0.50 per tonne on all export coal sold. This revision adds the Pikes Gully and other coal seams to the arrangement and avoids any confusion as to the blend of coals that may actually be sold (now that mining of the Liddell seam by underground method has ceased).

44 Mr Henness gave a copy of the letter to Mr Lynch and also to Mary Anne Clemson, the then Market Strategy Officer/Hunter of the plaintiff. Under Mr Henness’ supervision Mr Lynch and Ms Clemson went about investigating the proposal and preparing a response to it. This involved a good deal of financial modelling, largely carried out by Ms Clemson, and partly checked by the Treasury department of the plaintiff.

45 A further meeting took place between Mr Johnson and Mr Henness on 10 June 1993 at which Mr Johnson’s letter of 21 May 1993 was the subject of discussion. Mr Henness said to Mr Johnson that the proposal “whichever is the earlier” in the last paragraph of his letter was not “acceptable” to the plaintiff and it would have to be “whichever is the later”.

46 Following this meeting and further internal meetings of the plaintiff Mr Lynch faxed a draft letter to Mr Johnson on 18 June 1993 to replace Mr Johnson’s letter of 21 May 1993 (the June 1993 letter). It was a draft letter addressed to the Plaintiff from Mr Johnson and set out a number of confirmatory statements and a proposal by Cumnock that the remaining deliveries under its contract be delivered over the period to the end of June 1996. The letter also stated:

10. That the Export Royalty Deed be varied to equal $0.62 per tonne (as at June 1993) on all export coal sold. This revision adds the Pikes Gully and other coal seams to the arrangement and avoids any confusion as to the blend of coals that may actually be sold (now that mining of the Liddell seam by underground method has ceased).

We propose that the $0.62 per tonne royalty be increased in accordance with the current method for increases in Barrett seam Royalty as set out in Clause 2.4 of the Royalty Deed.

We also propose that the royalty remain in force until the equivalent value of this component of the original purchase price is repaid to Pacific Power, or upon expiry of the original lease, whichever is the later. The calculation of this equivalent value shall be in accordance with the attached spreadsheet which has been developed and agreed between Cumnock and Pacific Power.

We look forward to finalising the documentation for these arrangements.

47 From 25 October 1993, when the payment for the September royalty was made, Cumnock commenced paying royalties at the rate specified in the proposal in the June 1993 letter of $0.62 per tonne of export coal. The rate was increased in June 1994 and in January 1996 and was paid until to 30 November 1997 when the October 1997 payment was made. Each Royalty Payment certificate accompanying the payment stated that “The royalty paid is pursuant to our revision of the agreement currently being finalised”.

48 On 15 September 1993 following discussions between Mr Lynch of the plaintiff and Mr Johnson, and at Mr Johnson’s request, Mr Henness forwarded a letter to Cumnock. That letter referred to “recent discussions” between Mr Lynch and Mr Johnson and confirmed that it was the plaintiff’s understanding that coal delivery levels in recent months have “proceeded at a level consistent with levels outlined in Cumnock’s draft letter dated 21st March 1993”. This was a reference to the letter of 21 May 1993 as there was no relevant letter of 21 March 1993. The letter continued:

I further confirm that negotiations with respect to the proposal generally contained within that letter to extend the period for delivery of the contracted tonnage until June 1996 are continuing between Cumnock and Pacific Power.

49 On 10 October 1993 Mr Johnson received a copy of the first draft of the Cumnock Board papers for consideration. Within the Board papers relating to the domestic sales it was noted that Cumnock’s than current contract required delivery of 2.8m tonnes of which 1.5m tonnes had been supplied as at 30 June 1993 with the balance to be supplied by November 1994. The Board paper then noted that Cumnock and the plaintiff “have an arrangement whereby this balance can be delivered at an average rate of 35,000 tonnes per month extending the completion date of coal supply to June 1996”. It was also noted that the arrangement was not part of the “executed terms” but was documented in Appendix B. It is not clear on the evidence what this appendix was.

50 The Board papers also referred to export royalty and it was noted that export royalty was “per Revised Agreement (in progress) with” the plaintiff and the agreement was in “conjunction with Revised Delivery Schedule for domestic sales”. It was further noted that the “proposed royalty is $0.62 per tonne and is to be confirmed at this level when a revised contract is executed with” the plaintiff.

51 On 23 October 1993 Cumnock’s solicitors, Freehill Hollingdale and Page, (FHP) wrote to the plaintiff confirming the contents of the letter of 15 September 1993 and that the “current proposal” was contained within a draft letter prepared by the plaintiff in June 1993 for Cumnock’s approval. FHP set out the critical features of the proposal which it stated included the following:

2. the royalty deed dated 10 October 1991 will be amended so as to create a royalty of $0.62 per tonne, (as at June 1993) on all export coal sold;

3. the royalty remains in place until the agreed value is paid to Pacific Power;

4. the parties will agree to vary the security deposit requirements (the current requirement is $1,624,000. In view of the fact that deliveries under the agreement have past the half way point, a corresponding reduction, ie. to $812,000, would be appropriate).

Our client is now at a point where it wishes to finalise these agreements. This is because it is shortly to become a public float vehicle for the sale of shares in the Cumnock Group. A Prospectus is in final draft form and our clients have expended effort in preparing for this float. The market, in order to invest in the Cumnock Group with a degree of certainty, will need to know Pacific Power’s position which is summarised in the Prospectus.

52 FHP then advised that the terms of the draft prepared by the plaintiff in June 1993 were “acceptable” to Cumnock and asked the plaintiff to confirm “on an urgent basis” its intention to adopt the terms as a “variation of Coal Supply Contract No.4180”. FHP stressed that time was of the essence and referred to the finalisation of the prospectus the following Thursday. It stated that Cumnock would proceed on the basis that it would act on the terms of the letter being acceptable to Pacific Power unless FHP heard from the plaintiff otherwise.

53 Mr Henness wrote to FHP on 25 October 1993 and indicated that discussions had been under way for some time and while the “negotiations are nearing finalisation a number of detailed issues have yet to be resolved”. He informed FHP that any final negotiated position was subject to formal approval within the plaintiff and “in summary, the matters, as clearly noted in your letter, are proposals only, and subject to further negotiation”. Mr Henness advised that the plaintiff was not in a position to finalise the proposal prior to 28 October and that it was intended that a revised copy of the draft letter previously faxed by the plaintiff to Cumnock was to be forwarded to Mr Johnson that day.

54 On 25 October 1993 the plaintiff sent a further letter to Mr Johnson in which it stated that it had varied the earlier draft of the June 1993 letter. That variation in relation to the Royalty Deed was as follows:

on all coal sold other than that under Contract 4180

Other variations to the Royalty Deed which will be required include:

(i) the names of the parties to the deed;

(ii) the removal of any references to the Barrett Seam Royalty;

(iii) any other changes necessary to reflect the intent of this letter.

Furthermore, we proposed that the $0.62/tonne royalty be increased in accordance with the current method for increases in Barrett Seam Royalty as set out in Clause 2.4 of the Royalty Deed.

55 The bold portions of the letter are the changes made to the June 1993 letter. The first change removed the words “on all export coal sold” and referred to the coal other than under Contract 4180. The second change was the reference to the expressed need to vary the royalty deed with the names of the parties, the removal of the reference to Barrett seam and any other changes to reflect the intent of the letter. The plaintiff also forwarded a copy of this letter to Cumnock’s solicitors, FHP, with advice that the plaintiff did not agree to the inclusion of the letter in Cumnock’s Prospectus.

56 The Prospectus issued on 29 October 1993. It contained an invitation to prospective investors to subscribe for shares in Cumnock Coal Limited and in describing the Coal Sales under the heading “domestic” it stated:

57 Cumnock did not forward a letter in the terms suggested prior to the end of 1993. On 4 January 1994 Mr Lynch, for the plaintiff, wrote to Mr Johnson advising that the plaintiff requested Cumnock to submit “as a matter of urgency” a letter requesting extension of the contract period for Contract No.4180. He noted that a “revised draft” that had been “agreed between Cumnock and Pacific Power” had been forwarded to Cumnock in October 1993. Mr Lynch also advised Cumnock that if it did not submit the letter in the next few days to permit resolution of the matter by the end of January 1994 the plaintiff would have to “apply the existing provisions of the Coal Supply Contract, including the timing for the completion of deliveries”.

The Letters

58 On 7 January 1994 Mr Johnson faxed a letter dated 6 January 1994 to the plaintiff. The relevant portion relating to Royalty was as follows:

arrangement

earlier

We look forward to finalising documentation for these arrangements.

59 In this letter the words in bold had been changed with “arrangement” replacing “purchase price” and “earlier” replacing “later”. In the covering fax Mr Johnson made no mention of the “later/earlier” change and only stated:

Fax of proposed variation to 4180. Original by mail today.

Only variation to your draft is last paragraph of Royalty Deed – the agreement is for payment of the Present Value of the original arrangement (it is not referenced to “Purchase Price”)

60 In the Minutes of the Meeting of Directors of Cumnock Coal Limited of 31 January 1994 the following is recorded:

Pacific Power Contract

61 The reference to the clarification of the duration of the royalty is probably a reference to the different positions adopted by the plaintiff and Cumnock as to whether the royalty remained in force on the earlier of the two events listed or the later of the two events. The handwritten notes of the meeting record Mr Johnson as reporting the ”sticking point” as “Royalty 2008” or on a “PV Payment which is later”. It is noted Mr Johnson “believes earlier”.

62 Mr Johnson forwarded a faxed copy of the letter of 2 February 1994 with a coversheet that stated “revised variation to contract C4180 refers to royalty expiry period”. The letter was in exactly the same terms as the 6 January 1994 letter but for the deletion of the word “earlier” in the last paragraph and the insertion of the word “later” in its place. The full text of the letter was as follows:

Re: Variation of Coal Supply Contract No. 4180

I wish to confirm matters discussed at meetings with you held on 17th March and 10th June 1993, and associated telephone conversations, with respect to the proposed variation to coal supply contract No. 4180.

Pacific Power has indicated that there will be no invitation of tenders for supply of coal at the end of the current contract with Cumnock Coal, i.e. November 1994. The next opportunity for tendering for new coal supply is expected to be prior to expiry of contracts with some of Pacific Power’s mines in the Central coast conclude at end June 1996. Cumnock therefore proposes that the remaining deliveries under its contract be delivered over the period to end June 1996.

In consideration of these arrangements which provide assistance to both Pacific Power and Cumnock, Cumnock requests the following modifications to the existing provisions of the Contract.

1. Cumnock seeks to deliver the outstanding tonnage under the Contract, as at 1st July 1993, over the three year period ending 30th June, 1996.

2. The average rate of supply of coal over the extended delivery period referenced in 1 above shall be 35,000 tonnes/month. However, fluctuations in the delivery schedule around this average will be influenced by Cumnock’s export commitments.

- Deliveries on a six monthly basis for the remainder of the contract period.

4. The rate of supply of coal over the extended delivery period shall be a maximum of 60,000 tonnes per month. The actual tonnage to be delivered in any month shall be nominated by Cumnock and Cumnock shall provide Pacific Power with 30 days notice of the anticipated actual deliveries.

5. Pacific Power shall be under no obligation to accept daily tonnages above 4,000 tonnes per day.

6. The balance of the total tonnage of 2.8 million tonnes under the contract remains fully deliverable up until 30th June 1996. Pacific Power reserves the right to purchase coal from alternative sources to make up any shortfall below 2.8 million tonnes and Cumnock shall be liable for any additional cost incurred by Pacific Power in obtaining suitable make up coal.

7. Notwithstanding item (6) above, the outstanding tonnage to be delivered under contract as at 30th June 1995 shall not exceed 576,000 tonnes. Pacific Power reserves the right to purchase coal to make up for any shortfall necessary to ensure that a maximum of 576,000 tonnes remains tonnes remains deliverable as at 30th June 1995, and Cumnock shall be liable for any additional costs incurred by Pacific Power in obtaining suitable make up coal.

8. That the amount of security held by Pacific Power under Clause 8.4 of the Contract shall be varied for the period 1st July 1993 to the end of the Contract period to a sum equal to 2.16% of the remaining Contract value as at 1st July, 1993. The remaining Contract value shall be the product of the outstanding contract tonnage to be delivered as at 1st July 1993, multiplied by the adjusted contract Price for June 1993. i.e. the $26.84 discount price as at the Contract Base Date, escalated in accordance with the price fluctuation provisions of the contract, to the June 1993 price.

9. Replace the second and third paragraphs of Clause 7.16.5 with the following paragraphs.

Where representative coal quality has been carried out in accordance with this contract on 75% or more of the delivered tonnage in a month, the quality on any days where quality analysis has not been carried out shall be set equal to the tonnage weighted average for the days of the month on which representative coal quality analysis was carried out. This method shall be used for the purpose of calculating the quality adjusted price on those days when quality has not been provided.

Where representative quality analysis has been carried out in accordance with this contract on less than 75% of the delivered tonnage in a month, the quality on any days where representative coal quality analysis has not been carried out shall be set equal to the standard coal quality specified in Clause 3.1.

10. That the Royalty Deed be varied to equal $0.62 per tonne (as at June 1993) on all coal sold other than that under Contract 4180. This revision adds the Pikes Gully and other coal seams to the arrangement and avoids any confusion as to the blend of coals that may actually be sold (now that mining of the Liddell seam by underground method has ceased). Other variations to the Royalty Deed which will be required include:

Furthermore, we propose that the $0.62 per tonne royalty be increased in accordance with the current method for increases in Barrett seam royalty as set out in Clause 2.4 of the Royalty Deed.

We also propose that the royalty remain in forced until the equivalent value of this component of the original arrangement is paid to Pacific Power, or upon expiry of the original lease, whichever is the later. The calculation of this equivalent value shall be in accordance with the attached spreadsheet which has been developed and agreed between Cumnock and Pacific Power.

We look forward to finalising documentation for these arrangements.

63 In the Minutes of the meeting of Directors of Cumnock Coal Limited of 4 March 1994 the following is recorded:

Pacific Power Contract

64 On 23 May 1994 the General Manager of the plaintiff accepted the recommendation put forward by Mr Henness on 9 May that Cumnock’s proposal dated 2 February 1994 be “approved”.

65 On 30 May 1994 Mr Henness wrote to Cumnock in the following terms:

Re: Contract No 4180 – Modifications to Contract Provisions

I refer to your letter dated 2nd February, 1994, in which Cumnock proposed a
number of changes to contract 4180.

(i) Item 8 – Pacific Power calculates the varied security amount to be $743,000, based on 2.16% of the Contract value remaining as at 1st July, 1993, i.e. $27.53/t multiplied by 1,250,289 tonnes by 2.16%.

I would request that you contact directly Mr S Baggaley of Pacific Power’s Commercial Group on (02) 268 7033 to arrange lodgement of an appropriate security for the revised amount, and subsequent return of the original security advice.

(ii) Item 10 – Pacific Power proposes that as a first stage Pacific Power should redraft the Royalty Deed generally in accordance with Item 10, and provide Cumnock with a copy of that Draft for comment prior to its finalisation. The existing Deed will also need to be formally revoked by the relevant parties.

Please direct any queries on the above to Mr N Lynch, Fuel Supplies Manger/Hunter.

The Spreadsheet

66 The Spreadsheet was first referred to in the June 1993 letter. Following the receipt of that letter Mr Johnson met with Ms Clemson in July 1993. Ms Clemson informed Mr Johnson that she had prepared the spreadsheet which detailed the “breakdown” of the original purchase price and showed how royalties are to be calculated so that the cumulative value in 1991 dollars could be determined. The Spreadsheet (Ex.K) included a front sheet on which the following appeared:

18.3

67 The second sheet of the Spreadsheet comprised five groups of columns. The first group of columns recorded the tonnage delivered under Contract 4180 and the value of the discount price to the plaintiff in October 1990 dollars and in nominal dollars. The second and third groups of columns recorded the tonnage of Liddell Seam and Barrett Seam coal upon which royalties were payable under the original Royalty Deed calculated in October 1990 dollars and in nominal dollars. The fourth group of columns headed “Revised Royalty Deed” recorded the tonnage on which royalties would be payable under the revised Royalty Deed and calculated the value of those payments in October 1990 dollars and in nominal dollars. The fifth group of columns headed “Totals” was a total of the four other groups of columns and provided the accumulated value in July 1991 dollars. Ms Clemson provided a further Spreadsheet to Mr Johnson in which the “correct” calculation in relation to the government charges, a charge of $1.95 was included.

68 On page three of the spreadsheet there were two groups of columns. The first group was entitled “Calculation of Indices and Prices” and the second group was entitled “Discount Rate”. Ms Clemson had sent a facsimile to Mr Johnson prior to their meeting setting out various aspects of the contract price and the application of multipliers in the discount rate. Mr Johnson gave evidence in respect of that matter as follows:

Q: You will see also there is a reference at various places to the contract price per tonne, and that also in those pages from 401, it is at the top of the page 400, on page 400 another calculation starts and reaches that 29.66 at the bottom of the page, and the same figures or all starting with 29 appear in the third page of the spreadsheet, don’t they?
A: Yes. To get back to the base rate sell of how the Liddell domestic royalty works this calculation, we had to be sure that was correct and that was the purpose of that and those indexes include basic indexes at that time.

69 Ms Clemson used the Lotus software to prepare the Spreadsheet that included tonnage up to June 1993, based on the Environmental Impact Statement that was available to the plaintiff (Ex. J). The Spreadsheet was structured in a way that as time progressed it accommodated the further actual tonnages being inserted which then allowed the calculation of a cumulative value in July 1991 dollars of the royalty as it was received. This enabled both the plaintiff and Cumnock to track the amount of royalty paid. In January and February 1994 Ms Clemson met with Mr Blackburn at which time she provided the Spreadsheet to him and also to Mr Ray Durie and Ms Jill Brady of Bayswater Power Station. I am satisfied from Ms Clemson’s evdience that this was the Spreadsheet with the “correction” in it that had been given to Mr Johnson in 1993. This provision was not only in hardcopy but also on disk. Ms Clemson provided Messrs Blackburn and Durie and Ms Brady with “training” in the use of the Spreadsheet and the details of the calculation with particular emphasis on the escalation provisions.

70 From his evidence Mr Blackburn appears to have a good working knowledge of computer hardware and software. When he was provided with the Spreadsheet, in both hardcopy and disk, he informed Ms Clemson that he believed that it may not be suitable in the current form for the “normal administration of the royalty payments” and that he might “modify it” or “more likely modify my own programme that I use for administering the contract and royalty payment to do the calculations”.

Conduct after the Letters

71 During the performance of Contract 4180 there were regular meetings between representatives of the plaintiff and representatives of Cumnock (Ex. R2 380, 392, 411, 575: Ex R3 736 & 742) for administration purposes of that contract (4180 meetings) (tr. 220-221). Mr Blackburn attended those meetings and kept Mr Johnson informed of what occurred at the meetings. Mr Johnson kept Mr Blackburn informed about the negotiations between the plaintiff and Cumnock. Mr Johnson received copies of the Minutes of the 4180 meetings (the minutes).

72 On 16 June 1993 the minutes noted that "until the new agreement is in place it was resolved to continue with existing deliveries” (Ex R2 380). On 13 July 1993 the minutes noted that the "new delivery arrangements are being finalised between Pacific Power senior management and the Cumnock Directors" (ex R2 392). On 7 October 1993 the minutes noted that "both parties reported that formalising of the contract time extension is progressing" (Ex R2 411). On 12 November 1993 the minutes noted that "both parties reported that formalising of the contract time extension is progressing with the final draft in the hands of Cumnock" (Ex R2 575).

73 On 9 December 1993 the minutes noted that "the final draft letter requesting the contract time extension is in the hands of Cumnock. Pacific Power requested Cumnock to finalise and forward as soon as possible" (Ex R2 579). On 17 May 1994 the minutes noted that "Pacific Power advised the extension of contract time documentation is with the General Manager" (ex R3 736). On 8 June 1994 the minutes noted that "Pacific Power advised the extension of contract time is now in place and drew Cumnock's attention to their commitment to provide projections for monthly deliveries for the six months periods beginning 1 July and 1 January along with deliveries on a six monthly basis for the remainder of the contract period" (Ex R3 742). Mr Johnson said that the matters recorded in the minutes on 8 June 1994 were matters in which Mr Blackburn was involved directly under Mr Johnson's authority and that the minutes were correct. (tr.249)

74 The Royalty Payment certificates accompanying the royalty payments from Cumnock to the plaintiff detailed the calculation of royalty. Between October 1993 and May 1994 $0.62 was paid. On 2 June 1994 the Royalty Payment certificate, applying the quarterly indexation with the base price, increased the royalty payment to $0.63 (rounded). That amount was paid between 2 June 1994 and January 1996. On 31 January 1996 the Royalty Payment certificate once again noted the latest index and applied it to the Royalty payment, increasing it to $0.66. That amount was paid until Cumnock ceased paying royalties by notification in its letter in April 1998.

75 Deliveries under Contract 4180 were completed towards the end of 1995 or early 1996. On 28 February 1996 the plaintiff wrote to Cumnock advising that “the contract as modified in your letter dated 2 February 1994 was deemed to have reached the stage of Practical Completion on 26 February 1996” and that the letter could be taken as the Certificate of Practical Completion within the General Conditions of Contract.

76 In June 1996 the Managing Director of Powercoal, Philip James McCarthy, wrote to Mr Lynch and suggested that they review the original Royalty Deed to reflect “variations agreed to in recent times”. On 4 July 1996 Mr Lynch wrote to Cumnock, enclosing Cumnock’s 2 February 1994 letter and stated that “Item 10 of the letter references the agreed modifications to the Royalty Deed”.

77 On 27 June 1997 the Mine Manager of Cumnock at the time, Mr Ian McRae, and Rodger James Williams, the Chief Financial Officer of Cumnock at the time, met with Peter Cribb, a solicitor employed by the plaintiff, and Mr Lynch. At that meeting either Mr Cribb or Mr Lynch informed Mr McRae and Mr Williams that they had started the redraft of the Royalty Deed.

78 On 18 September 1997 Mr Lynch telephoned Mr Williams and informed him that the plaintiff had accepted Cumnock’s proposal in February 1994 in its letter of 30 May 1994 “which included how much the security amount would be”. Mr Lynch informed Mr Williams that the Royalty Deed had not yet been redrafted and he was hoping to find the file at Macquarie Generation at Lambton. Mr Lynch forwarded Mr Williams a copy of the plaintiff’s letter of 30 May 1994. There were further discussions between Mr Lynch and Mr Williams in October, November and December 1994 in which they discussed redrafting the Royalty Deed. The original deed still had not been found as at December 1997.

79 Mr Johnson retired from the position of Managing Director of Cumnock at the end of 1996. Mr Peter Coates became Managing Director of Cumnock and on 24 April 1998 wrote to the plaintiff advising that he had reviewed the correspondence between the plaintiff and Cumnock “in relation to negotiations to amend the Royalty Deed” (Ex. R3 872). Mr Coates claimed that the negotiations “had never been concluded and consequently the Royalty Deed had never been amended” and:

“paid pursuant to our revision of the agreement currently being finalised”.

80 It is difficult to reconcile Mr Coates’ statement in relation to the mining of the Liddell Seam and Cumnock’s anticipation that it would not be mining it in the “medium term” with the evidence in this case. There was no underground mining of the Liddell seam after June 1993 however Mr Blackburn gave evidence that there was mining from the Liddell seam in the South Open Cut until January 1999 (tr. 277).

81 On 14 October 1999 the plaintiff wrote to Cumnock advising that its letter of 2 February 1994 was “accepted by letter dated 30 May 1994 and has been acted on by both parties”. The plaintiff advised that this resulted in the acceptance of a revised guarantee in the lesser sum and the delayed deliveries of coal. It further advised that the royalty payments were also accepted at the revised rate of $0.62 and in accordance with the letter of 2 February 1994 that the royalty rate was adjusted from time to time.

82 The plaintiff pointed out that Cumnock’s letter of 2 February 1994 had confirmed that after the equivalent value of the original arrangement was paid, the royalty payments would continue until the end of the original lease. The plaintiff claimed that the effect of the correspondence and the subsequent conduct of the parties meant it was not necessary for an amended Royalty Deed to be executed for the agreement to be effective. The plaintiff requested that the royalty payments be immediately resumed and that Cumnock pay outstanding arrears promptly.

83 On 25 October 1999 Cumnock advised the plaintiff that it maintained the position that the negotiations were never concluded and that “the Royalty Deed therefore stands on its original terms”. It demanded the “repayment” of what it claimed to have been an overpaid sum of $1.82 million.

84 On 14 January 2000 the plaintiff advised each of the second, third and fourth defendants that Elcom had assigned all of its rights under the Deed of Guarantee to ECNSW, which was by then the plaintiff. The plaintiff advised each of the personal defendants that Cumnock had failed to pay any royalties since 3 February 1998 when payment was received on that date for royalties for the month of November 1997. The plaintiff demanded payment pursuant to Clauses 2 and 3 of the Deed of Guarantee of all royalties and interest due since 3 February 1998 to 14 January 2000. On 28 January 2000 Elcom advised Cumnock that its right and interests in the Royalty Deed and the Sale Agreement and other various agreements affecting the sale of the Mine had been assigned to the plaintiff by Deed dated 21 May 1993.

Proceedings commenced

85 The plaintiffs commenced these proceedings on 1 February 2000. They were heard by me on 3 to 7, 11, 12 & 13 September and 2 & 12 October 2001. Mr JL Trew QC, leading Mr GR Waugh of counsel, appeared for the plaintiffs and Mr R Weber SC, leading Ms A Mountfort of counsel, appeared for the defendants.

Is there a binding contract?

86 The plaintiffs submitted that by 30 May 1994 the parties had reached finality in arranging all the terms of their bargain and intended to be immediately bound to the performance of those terms but at the same time proposed to have them restated in a form which would be fuller and more precise but not different in effect: Masters v Cameron (1954) 91 CLR 353 at 360. Put another way, it is submitted that final mutual assent of the parties had been reached so that those who drew up the final deed would not have the power to vary the terms already settled: Rossiter v Miller (1878) 3 App.Cas 1124 per Lord Blackburn at 1151.

87 Cumnock submitted that the evidence establishes that the intention of the parties was not to make a concluded bargain at all, unless and until the new Royalty Deed was executed. In Masters v Cameron Dixon, Mc Tiernan and Kitto JJ said at 361:

Summergreene v Parker

88 Both the plaintiffs and the defendants relied upon the language used in the Letters and the conduct prior to and after the Letters in support of their competing submissions. In assessing this matter it is important to apply the principles relevant to this case as identified in Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61. Those principles are (1) that pre-contractual conduct may be considered on questions of construction, if the contract is ambiguous and the pre-contractual conduct casts light on the genesis of the contract, its objective aim, or the meaning of any descriptive term, (2) that post-contractual conduct may be considered on the question of whether a contract was formed, (3) that post-contractual conduct may not be considered on the question of what a contract means as distinct from the question of whether it was formed and (4) that the construction of a contract is an objective question for the court and the subjective beliefs of the parties may be considered in the estoppel claim but not in the consideration of this question (at pars [24-27] per Heydon JA).

89 Cumnock submitted that this was “classically” a third category Masters v Cameron case. In this regard emphasis was placed upon the recognition in the Letters that the parties intended that the Royalty Deed would be amended and the fact that clause 11 of the Royalty Deed precluded amendment except by a further Deed executed by the parties. It was submitted that this is fatal to the plaintiffs’ submissions on this aspect of its case.

90 Both parties relied upon the absence of a new Royalty Deed prior to Cumnock's letter of 28 April 1998 in support of their competing submissions. Cumnock submitted that such absence, and the failure to reach the “first stage” of preparing the draft for Cumnock's comments, is very telling evidence that the parties did not intend to be legally bound by the Letters. The plaintiffs relied on the same evidence in support of the submission that the evidence demonstrates that both parties proceeded on the basis that they were bound immediately and the preparation a draft Deed was not of pressing importance to either party.

91 Clause 11 provided that the Royalty Deed “may not be amended except by a further deed executed by the parties”. The Royalty Deed was between Elcom, which had assigned its rights under the Deed to the plaintiff's predecessor ECNSW, and Stocklyn. Cumnock’s letter of 2 February 1994 recognised that the parties to the Deed to be drafted would be different to the parties to the Royalty Deed. The plaintiff’s letter of 30 May 1994 recognised this matter and noted that the Royalty Deed would need to be formally revoked. Finality of agreement is capable of being reached without the Deed being executed. It will depend upon the facts, which I will now consider.

92 In October 1993 Cumnock invited the plaintiff to agree that the terms of the June 1993 letter should be “adopted” as a “variation” to Contract 4180. At this time Cumnock had already commenced to pay the royalty at 62c on what, at that stage, was referred to as “all export coal sold”. The plaintiff declined to accept Cumnock’s invitation. It adopted the position that the parties were still in “negotiations” and a “number of detailed issues needed to be resolved”.

93 At this time the features of the proposal, as it related to royalties were (a) that the amount of $0.62c was to be paid on all export coal sold, (b) that 62c was to be increased in accordance with Clause 2.4 of the Royalty Deed, (c) that royalty payments were to continue until the equivalent value of “this component” of the original purchase price was repaid to the plaintiff or the expiry of the original lease, whichever was the later, and (d) the calculation of the equivalent was to be in accordance with the Spreadsheet developed and agreed between the plaintiff and Cumnock.

94 This position changed prior to Cumnock’s letter of 2 February 1994. On 25 October 1993 the words “on all coal sold other than that under Contract 4180” replaced the words “on all export coal sold” and reference was made to the additional matters to be included in the Royalty Deed of the change of name of the parties, the removal of references to the Barrett Seam Royalty and any other changes to reflect the intent of the letter. On 6 January 1994 the word “earlier” replaced the word “later” and the term “arrangement” replaced the term “purchase price”.

95 On 6 January 1994 when Mr Johnson removed the word “later” and inserted the word “earlier” I am satisfied that he was attempting to achieve that which he had been trying to achieve since his first letter of 21 May 1993 was sent to the plaintiff. If Mr Johnson had achieved the “earlier” rather than “later” time frame, it would have meant that once the payment of the equivalent value of the royalty component was made, no further royalties were payable. It would have also meant that if payment of the royalty component had not been made by the end of the term of the lease, no debt would have accrued after the termination date of the lease. This was a more attractive proposition for Cumnock and I have little doubt that this is what was discussed at the Board Meeting of 31 January 1994 and referred to by Mr Johnson as a “sticking point”. The “sticking point”, it seems to me, was the only point upon which the parties were unable to agree at that time. However the plaintiff was very firm in its view, which it expressed to Mr Johnson, that the term “earlier” was unacceptable to it. It was not interested in a change in the arrangement if that term was to be included.

96 Mr Johnson’s explanation in relation to the comparison of the use of the term “earlier” or “later” was quite curious. He said it made no difference (tr.244). This was at a time during the trial at which Mr Johnson had maintained his case that the royalty payments were capped at $4.1 million. I have already referred to the withdrawal of the defence and claims in the cross claim that relied upon the claim that the royalty payments were to be capped at $4.1 million. I infer from such withdrawal that such cases were simply unsustainable.

97 Mr Henness and Ms Clemson were cross-examined to the effect that discussions with Mr Johnson occurred in which reference was made to the royalties being capped at $4.1 million. These alleged conversations were denied. This was before Mr Johnson gave his evidence and Cumnock withdrew the relevant parts of the defence and cross claim based on the $4.1 million cap. There has been no express withdrawal of the suggestion that such statements were made. The letters and covering faxes of the letters of 6 January and 2 February 1994 militate against such an understanding and provide no support for such an understanding, let alone any suggested express statement. It is probable that with the withdrawal of the relevant parts of the defence and cross claim Cumnock no longer relies on that evidence but for abundant caution I should record that I prefer Ms Clemson and Mr Henness’ evidence to that of Mr Johnson in respect of the $4.1 million alleged conversations. I am satisfied that such conversations did not happen.

98 Notwithstanding the propriety of withdrawing the defence and claims in the cross claim based on the $4.1 million cap in the light of the evidence given by Mr Johnson it is a matter that I should take into account in assessing Mr Johnson’s evidence in relation to the choice of the term “earlier” or ”later” in the letter. I am satisfied that Mr Johnson knew it was an important matter to the plaintiff that the term “later” was included in the proposal. The fact that he changed the letter of 6 January 1994 to include the term “earlier” without highlighting that change in the covering fax was explained on the basis that it did not make much difference. I do not accept that as an explanation of the situation. It was an important difference and I am satisfied that difference was appreciated and understood by Mr Johnson and Cumnock at that time when they knew, from the plaintiff’s letter of 4 January 1994, that the plaintiff wanted the final proposal “urgently” otherwise it would revert to the original delivery regime under Contract 4180. A decision had to be made by Cumnock as to whether it would agree to the term "later" in the knowledge that if it did not the plaintiff intended to return to the original delivery schedule.

99 The only matter Cumnock drew attention to in its proposal of 6 January was the change from “purchase price” to “arrangement”. Mr Johnson suggested the term “purchase price” in his letter of 21 May 1993. The term “arrangement” was also Mr Johnson’s suggestion. Mr Johnson had resisted allowing any public disclosure of the breakdown of the $18.3 million because he took the view that such information was confidential and commercially sensitive. The figures that he had recorded in his diary in respect of the breakdown on 17 March 1993 were "Cash 7.6, Liddell 9.1 and Barrett 1.6" with a total 18.3 for what he recorded as the "breakdown of the LS Purchase", being a reference to Liddell State, or the Mine purchase. The term "arrangement" reflected the amounts to the royalty component in the Spreadsheet. The term "purchase price" encompassed the different figures that Mr Johnson noted in March 1993.

100 The plaintiff noticed the term “earlier” and once again informed Mr Johnson that it was not acceptable to it. Thus the “sticking point” had arisen. The only change in the letter of 2 February from the terms of the 6 January letter was the deletion of the word ”earlier” and the insertion of the word “later”. The covering fax for the 2 February letter referred to Contract 4180 and then stated “refers to Royalty expiry period”. The “sticking point” had disappeared.

101 The letter of 30 May 1994 from the plaintiff to Cumnock stated that the plaintiff accepted Cumnock's proposal "in principle for the modifications" referred to in Cumnock's letter of 2 February 1994. The only matters referred to "in particular" in the plaintiff's letter were paragraphs 8 and 10 relating to the reduction in security and the royalty payments respectively.

102 Cumnock had used the expression "modifications" in its letter in which it requested "modifications to the existing provisions of the Contract". Paragraphs 1 to 7 dealt with the extension of the time to deliver the coal to 30 June 1996 and the average rate and maximum amount of supply of coal per month, with the rider that fluctuations in the delivery schedule would be influenced by Cumnock's export commitments. These paragraphs also dealt with the requirement for Cumnock to provide the plaintiff with projection of deliveries in June and December of each year and the limit of coal per day after which the plaintiff was entitled to reject further deliveries.

103 Paragraph 8 provided a formula for ascertaining the amount of the reduced security. Paragraph 9 suggested the replacement of the second and third paragraphs of clause 7.16.5 of Contract 4180 with paragraphs included in the letter relating to the method to be used in setting coal quality in respect of the standard coal quality specified in clause 3.1 of Contract 4180. Paragraph 10 dealt with the royalty payments.

104 The use of the term "in principle" is relied upon by Cumnock to submit that final agreement was not reached between the parties. When such a term is used in circumstances such as this it is important to look at the context of the term and the conduct of the parties to ascertain whether the parties intended to be bound immediately by the terms of the Letters or whether further steps had to be taken or further agreement reached prior to the parties intending to be legally bound. There were no further steps taken by the plaintiff or Cumnock in respect of Contract 4180 by way of execution of an amended Contract. The coal was delivered pursuant to the requests made in Cumnock's letter and when those deliveries were completed, earlier than anticipated as it turned out, the plaintiff issued a certificate of practical completion of the Contract 4180 in which it referred to the contract "as modified" in Cumnock's 2 February 1994 letter. This makes it very difficult for Cumnock to succeed in its submission that the term "in principle" in the context and in the circumstances of the Letters meant that the parties did not intend to be immediately legally bound.

105 From 30 May 1994 to the date upon which the certificate of practical completion was issued there was no debate about the agreement not being final and no reference was made to or reliance was placed on the term “in principle”. Notwithstanding the use of the term "in principle" the parties clearly intended to be bound immediately by the terms of the Letters. Cumnock submitted that the paragraphs in the letters relating to Contract 4180 should be viewed quite independently of the paragraphs relating to the security and the royalty payments.

106 I should deal firstly with the security. Almost immediately after Cumnock received the plaintiff's letter of 30 May 1994 it communicated with the plaintiff for the purpose of reducing the amount of security. Once again there was no debate about whether further agreement had to be reached and the parties moved promptly to reduce the security from $1.6 million to approximately $743,000. It is obvious that the parties intended to be immediately legally bound by the terms of the Letters notwithstanding the use of the term "in principle" in the plaintiff's letter of 30 May 1994.

107 There is a further matter upon which Cumnock relies in addition to the use of the term "in principle" in the letter to submit that the parties intentions in relation to the royalty payments were different from their intentions as disclosed in the letters and conduct in relation to the delivery of the coal and the reduction in the security. Cumnock relied on the terms of the Royalty Payment certificates in support of the submission that they demonstrate that the parties intended not to be bound until the new Royalty Deed was executed. The words used in the certificates were as follows:

Royalty Due – Export Coal

108 Please find enclosed our cheque for $ (amount), being payment in relation to export of coal from Cumnock No. 1 Colliery Pty Ltd during (particular month and year). The royalty paid is pursuant to our revision of the agreement currently being finalised.

Our calculation is as follows:

Royalty Price per Tonne:

109 The certificates were prepared on a word processor. There was a precedent in the form above and the typist was provided with the information to “fill in the gaps” (tr. 273). Mr Blackburn would then check each certificate before it was sent to the plaintiff. The words “the royalty paid is pursuant to our revision of the agreement currently being finalised” were included at Mr Johnson’s direction in the first certificate at the rate of $0.62 in October 1993. At that time the plaintiff had sent the draft to Cumnock but Cumnock had not “adopted” the terms by writing a letter in such terms to the plaintiff. The parties were in the process of finalising their agreement.

110 Prior to the change to the payment of the $0.62 royalty per tonne, the plaintiff was entitled to a royalty on Liddell Seam coal of 5% of the Royalty Price per tonne that was the Contract Price per tonne less government royalties and excise. If the Contract Price increased then the Royalty Price increased by reason of the fixation at 5% of that price. Equally if the Contract Price decreased the Royalty Price decreased. This was not the case in respect of the Barrett Seam Coal. The Royalty paid on that coal was $0.30 per tonne and clause 2.4 of the Royalty Deed provided for an increase in that royalty by the same proportion that the Contract Price per tonne had increased during the immediately preceding royalty period, being the previous month. The Contract Price per tonne was the base price adjusted in accordance with the formula in Schedule One of the Royalty Deed. If the Contract Price decreased the Royalty did not decrease but remained at the same rate for the previous month.

111 Cumnock’s letter of 2 February 1994 proposed that the $0.62 Royalty be “increased with the current method for increases in Barrett seam Royalty as set out in Clause 2.4 of the Royalty Deed”. The Royalty of $0.62 which was then paid on coal from all seams including Liddell, Barrett, Pikes Gully and others, was, under this proposal, to increase by the same proportion that the Contract Price per tonne had increased in the previous calendar month and if the Contract Price decreased then the Royalty was protected against decreases and remained at the rate paid in the previous month.

112 The Joint Report of the parties’ experts, Bill Rock of Ernst & Young and Paul Johnson of Deloitte Touche Tohmatsu, dated 6 July 2001 (App 3.1), and Mr Johnson’s Report of 21 September 2001 (Ex. 13 App 3.1) contain a list of the Contract Prices per tonne for the months July 1994 to October 1997. According to those Reports the Contract Price per tonne increased each quarter in 1994 from $27.97 for the third quarter to $28.32 for the last quarter. In 1995 the Contract Price per tonne is recorded in the respective quarters as $28.53, $28.98, $29.34 and $29.67. In 1996 they are recorded as $29.88, $30.00, $30.18 and $30.25 and in 1997, as $30.30, $30.35, $30.28 and $30.16.

113 The Royalty rate in October 1993 was $0.62 and was increased in June 1994 to $0.63 (rounded) and remained at that rate until January 1996 when it was increased to $0.66 (Ex 3A). The Royalty rate was adjusted by the formula in each Royalty Payment Certificate which between July 1994 and December 1995 stated that the rate was “indexed quarterly with the base price: 109.3 commencing July 1 1994”. From January 1996 the Certificates stated that the rate was “indexed quarterly with base of 111.2 at June 94”. Although the rates were not changed every Royalty period or month it is clear that the Contract Price per month remained the same for each quarter and then changed. The Royalty rate was not increased strictly in the same proportion as the increases in the Contract Price per month. For one thing, the Contract Price remained the same throughout the quarter. For another, the experts indexed the Contract Price on a quarterly basis. The increase in the royalty rate from $0.62 to $0.66 in January 1996 was an increase of approximately 6.4%. The increase in the contract Price from $27.97 to $29.98 was an increase of approximately 6.8%. With the approach of rounding of the royalty rate, the increases between 1994 and 1996 generally kept pace with the increases in the Contract Price. However the royalty rate had not been further adjusted by the time the payments were terminated.

114 What is of significance is that the Royalty rate was paid at $0.66 in July, August, September and October 1997 notwithstanding that the Contract Price per tonne decreased from $30.35 to $30.28 for the months July, August and September and then again down to $30.16 in October 1997. The Royalty rate was not decreased and was only stopped after the payment was made in November 1997 when the new Managing Director took the reins of Cumnock and notified the plaintiff in April 1998 that he was of the view that “negotiations had never been concluded” and referred to the royalty payments that had been made as “interim”. I do not know what the Contract Price per tonne was after the last quarter of 1997 however there is evidence of a “general weakening of coal prices” (tr. 292) although not month and year specific, and of Cumnock suffering a “considerable” loss in 1998 after a profit in 1997 (tr. 292-3), from which I conclude that more probably than not the Contract Price per tonne continued to decline after October 1997.

115 The terminology used by the plaintiff in its letter of 30 May 1994 in suggesting that “as a first stage” the Royalty Deed would be drafted and sent for comment by Cumnock prior to its “finalisation” is also relied upon by Cumnock to submit that it evidences a lack of final agreement. At no stage during the four years during which the royalty was paid at the new rate or the three and a half years from the time the plaintiff accepted Cumnock’s proposal in May 1994, did Cumnock demand or call for or request a redraft of the Royalty Deed. There was a telephone call between Mr Williams and representatives of the plaintiff in 1997 to which I have referred earlier in the judgment, but those discussions petered out as the search for the original Royalty Deed continued. They were also overtaken by the intervention by Mr Coates. It was submitted that the redraft of the Royalty Deed was really not Cumnock’s responsibility because the plaintiff had suggested that it would redraft it and send it to Cumnock. However it was Cumnock’s proposal that referred to the matters to be included in the Deed.

116 There is no doubt that the plaintiff suggested that it would prepare a draft and there is no doubt that in 1996 and 1997 some effort was made to find the original Deed and the Spreadsheet to start the drafting process. There was no demand made by Cumnock at either of those times that the Deed had to be produced otherwise the Royalty payment would cease. There was certainly no suggestion that the payments were "interim". That is a term that was adopted by Mr Coates in 1998. In particular, in 1997, when the Contract Price per tonne decreased no suggestion was made by Cumnock that negotiations had not been concluded and therefore the rate of the Royalty would have to return to the regime that was in place prior to the payment of the $0.62. The rate was paid without decrease consistent with the “method” in clause 2.4 of the Royalty Deed.

117 Indeed it is not surprising that Cumnock did not suggest a return to the original arrangement. A significant change had occurred which prevented Cumnock from doing so. It was the change in the way Cumnock kept its records. Mr Johnson gave evidence of the difficulty in having to keep such records to identify the different seams from which the coal was extracted as one of the reasons he wanted to change the arrangement. He of course wished to change it at a rate of $0.50c but ultimately put the proposal at $0.62c. Mr Blackburn gave evidence that since October 1993 Cumnock has not kept any records that identify sales from the Liddell Seam or Barrett Seam to persons other than the plaintiff. He said that it was “not necessary” to keep such records after October 1993 (tr. 275).

118 Deliveries of coal under Contract 4180 proceeded under the terms of the Letters. The security was reduced as provided for in the Letters. Cumnock paid the changed rate of Royalty to the plaintiff for three and a half years at the rate in the Letters. Although the increases in the Royalty payments were not strictly in accordance with clause 2.4, the payment at the increased rate notwithstanding the decrease in the Contract Price per tonne certainly was in accordance with that clause as provided for in the Letters. Cumnock paid Royalties on new seams such as Pikes Gully and others as provided for in the Letters for three and a half years. Cumnock abandoned the keeping of records in relation to the Liddell Seam and Barrett seam as there was no necessity because the rate was payable on all coal and it was irrelevant which seam from which the coal came. No records were kept even after Cumnock stopped paying royalties but Mr Blackburn continued to prepare the Certificates although no payments were made to the plaintiff.

119 The sentence in the Certificate "the royalty paid is pursuant to our revision of the agreement currently being finalised" was included at a time when the statement was accurate. That was in October 1993 when there is no doubt that the parties were still "finalising" the agreement. In final submissions Cumnock has referred to this sentence as a “disclaimer” (par 24 (iii)). I am not satisfied that this sentence should be read as Cumnock denying that agreement was reached in 1994. This sentence remained part of the Certificates during the period until payment was stopped. It was part of a precedent or pro forma letter that was on the word processor or system. I am satisfied that although the sentence was applicable in October 1993 events overtook it in 1994 and its inclusion did not reflect what had happened. This is particularly so having regard to the fact that not only was the royalty payment made at the different rate but it was also increased and did not decrease even when the Contract Price per tonne decreased. This sentence was seized upon by Mr Coates to suggest that negotiations had not been concluded at a time when Cumnock was about to suffer a considerable loss in the year 1998 at a time when coal prices were on the decline.

120 A further matter to be taken into account is the approach of the author of the 2 February 1994 letter, Mr Johnson, in his evidence. Mr Johnson’s position as expressed in his evidence prior to the withdrawal of the relevant parts of the Defence and Cross Claim was not that agreement had not been reached, rather it was that agreement had been reached which capped the payments at $4.1 million (Ex 1 par.64).

121 There is no doubt that a contract may be inferred from the acts and conduct of parties in the light of the surrounding circumstances but that conduct must be capable of proving all the essential elements of an express contract. In Pobjie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105 at [23] Mason P cited with approval the approach adopted by Bingham J, which was confirmed on appeal, in Pagnan SpA v Feed Products Ltd [1987] 2 Lloyds Rep 601. Bingham J said at 611:

Port Sudan Cotton Co v Chettiar

In considering this question I do not much like the analysis in the textbooks of enquiring whether there was an offer and acceptance or a counter-offer and so forth. I prefer to examine the whole of the documents in the case and to decide from them whether the parties did reach an agreement upon all material terms in such circumstances that the proper inference is that they agreed to be bound by those terms from that time onwards.

122 This is the approach that I have adopted in this case. The documents, the Letters and the conduct of the parties have required close scrutiny. The use of the words “in principle” in the letter of 30 May 1994 may present to some as persuasive to a finding that there was no intention in the parties to be immediately legally bound. However when the surrounding circumstances and the parties conduct are analysed those words do not carry the significance that they may otherwise have had and are in my view no more than curious: G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 635E-F.

123 In this case it is important to take into account the context or surrounding circumstances in which the parties wrote the Letters. This included a number of drafts that had been discussed at a number of meetings for the purpose of reaching the final agreed position. This was not a case of the ‘usual’ proposal and counter proposal and further proposal. The first proposal was put by the letter of 21 May 1993 from Cumnock to the plaintiff. The June 1993 letter was the plaintiff’s suggested amendments to Cumnock’s letter. The next letter in October 1993 was the plaintiff’s further suggested amendments to Cumnock’s letter. Cumnock’s letters of 6 January 1994 and 2 February 1994 were amendments made by Cumnock to the suggested amendments made by the plaintiff. This was a joint drafting process until consensus was reached.

124 I am not satisfied that the failure to execute a deed is "fatal" to the plaintiff's submission that the parties had reached finality in arranging all the terms of their bargain and intended to be immediately bound to the performance of those terms but at the same time proposed having them restated in a form which would be fuller and more precise but not different in effect. I am satisfied that the parties had reached finality in arranging all the terms and that they intended to be immediately bound to the performance of the terms. Indeed they performed those very terms. The failure to execute a deed does not mean that the agreement was not final or binding: Creamoata Ltd v The Rice EqualisationAssociation Ltd (1953) 89 CLR 286; Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500; Westfarmers Bunnings Ltd v Angus & Robertson Bookworld Pty Ltd [1998] VSC 101. Clause 11 of the Royalty Deed is not an impediment having regard to the parties’ recognition that the Deed would be revoked and a new deed with different parties would be drafted. The plan to draft a document floundered in 1997 by reason of the loss of the original deed and the continued search for the spreadsheet and was overtaken by Cumnock’s letter of 28 April 1998.

125 Cumnock submitted that there was much to be done to the Spreadsheet prior to any drafting of a Royalty Deed being able to be concluded. I disagree. The Spreadsheet was finalised and adopted by Cumnock and used by Mr Blackburn in his computer system to track the royalty payments. The parties intended by their reference to the Spreadsheet in the Letters to refer to the "component" of $9.6 million. There was nothing uncertain about the reference to the Spreadsheet that precludes a finding that the parties intended to be bound by the terms of their agreement.

126 The factual matrix and surrounding circumstances at the time of the exchange of the Letters, the terms of the Letters and the commercial reality of the parties conduct from 1994 to 1998 in the context of the Letters leads me to the irresistible conclusion that they had finally agreed on the terms and intended to be legally bound by those terms and in respect of the royalty payments to have those terms restated in a form fuller and more precise but not different in effect: Masters v Cameron (1954) 91 CLR 353 at 360. That was a concluded and binding contract.

127 The plaintiffs also relied upon what has been identified in the authorities as a fourth class of case additional to the three mentioned in Masters v Cameron. That was recognised by Knox C. J., Rich J. & Dixon J. in Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 317 as "one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms". In that case their honours referred to the speech of Lord Loreburn in Love & Stewart v S Instone & Co Ltd (1917) 33 TLR 475 at 476 where his Lordship said:

It was quite lawful to make a bargain containing certain terms which one was content with, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that were the intention of the parties, then a bargain had been made, none the less that both parties felt quite sure that the formal document could comprise more than was contained in the preliminary bargain.

128 Consensus was reached and that consensus was capable of forming a binding contract. The plaintiff and Cumnock had reached agreement on the "essentials". It was not a variation to the Royalty Deed. It was a new agreement. They agreed that the royalty of $0.62 is to be paid on all coal sold other than under Contract 4180; that the royalty rate is to increase in accordance with the method for increases in clause 2.4 of the Royalty Deed and that the royalty payments are to continue on such coal until the equivalent value of $9.6 million is paid or the expiry of the original lease whichever is the later. They agreed that the document that was to be drafted would include the terms of the original Royalty Deed amended or varied to reflect the terms of the bargain reached.

129 The plaintiff is entitled to a declaration in terms of paragraph 1 of the Amended Summons and an order in terms of paragraphs 3 of the Amended Summons.

The guarantees

130 The second, third and fourth defendants each agreed to guarantee the obligations of Stocklyn under the Sale Agreements. "Sale Agreements" was defined in the Deed of Guarantee to include the Royalty Deed to be entered into between Elcom and Stocklyn as “such document is amended from time to time”. (cl 1.1) The defendants agreed that they “jointly and severally unconditionally and irrevocably guarantee” to Elcom “the due and punctual payment and performance in accordance with the provisions of each of the Sale Agreements of all moneys and obligations expressed to be payable or to be performed” by Stocklyn under each of the Sale Agreements, which included the Royalty Deed. (cl 2.1)

131 The plaintiffs submitted that the term "as such document is amended from time to time" is broad enough to bring within the scope of the guarantee the agreement reached in 1994. However I have found that the parties intended that the Royalty Deed should be revoked. Although the agreement between the plaintiff and Cumnock included the terms in the Royalty Deed varied to reflect the agreement reached in 1994, it was a separate agreement. It was not an amendment to the "document". The language of the guarantee indicates a clear intention to limit the scope of the guarantee to amendments to the Sale Agreements, as defined, and as amended from time to time: Trade Indemnity Co Ltd v Workington Harbour and Dock Board [1937] AC 1 at 21-22. There is no express or clear intention to guarantee Cumnock's future performance of the 1994 agreement and it is not within the scope of the guarantee.

132 The plaintiffs submitted, as a “fall back” position, that the second, third and fourth defendants consented to the “variation of the principal contract”. It was submitted that the second and third defendants entrusted to Mr Johnson the negotiations with the plaintiff and participated at Board level of Cumnock with the decision. It was also submitted that they accepted that there was a variation to Contract 4180. The plaintiffs’ submissions in this regard were focused upon the circumstance of a finding of variation to the Royalty Deed and a submission that in the circumstances mentioned above the defendant’s would not be discharged from their obligations under the guarantee. There is some evidence that the parties contemplated an amendment to the guarantee in a meeting between Mr Johnson, Ms Clemson and Mr Byrnes on 11 August 1993. Mr Byrnes’ note of the meeting recorded that the “guarantee will be revised”. No further evidence was given in respect of the guarantee. In any event I do not need to consider these submissions any further having regard to my findings. The plaintiffs’ claim against the defendants in relation to the guarantee fails.

133 Having regard to the findings I have made the cross claims will be dismissed.

Orders

134 I make the declaration in paragraph 1 of the Amended Summons. I make an order in terms of paragraph 3 of the Amended Summons. The balance of the Amended Summons, excluding paragraph 7, is dismissed. The cross-claims are dismissed. If the parties are unable to agree on a costs order I will hear argument on a date to be fixed.

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Last Modified: 12/03/2001

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Citations

Pacific Power and Elcom Collieries Pty Ltd v Cumnock No 1 Colliery Pty Ltd, John Hodge, Helen Janice Dalton and Thomas James Johnson [2001] NSWSC 1100

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Statutory Material Cited

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CITATION:	Pacific Power & Elcom Collieries Pty Ltd v Cumnock No 1 Colliery Pty Ltd, John Hodge, Helen Janice Dalton & Thomas James Johnson [2001] NSWSC 1100
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50008/00
HEARING DATE(S):	3, 4, 5, 6, 7, 11, 12 & 13 September and 3 & 12 October 2001.
JUDGMENT DATE:	30 November 2001
PARTIES :	Pacific Power (First Plaintiff) Elcom Collieries Pty Ltd (Second Plaintiff) Cumnock No. 1 Colliery Pty Ltd (First Defendant) John Hodge (Second Defendant) Helen Janice Dalton (Third Defendant) Thomas James Johnson (Fourth Defendant)
JUDGMENT OF:	Bergin J

COUNSEL :	JL Trew QC leading GR Waugh (Plaintiffs) R Weber SC leading A Mountfort (Defendants)
SOLICITORS:	Davis & Davis (Plaintiffs) Mallesons Stephen Jaques (Defendants)
CATCHWORDS:	[CONTRACT] Whether exchange of correspondence created an immediately binding contract - Intention of the parties to be bound by the agreement. - [GUARANTEE] Whether guarantors remained bound to perform the obligations under the guarantee in relation to the new agreement between the parties.
CASES CITED:	Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61. Creamoata Ltd v The Rice Equalisation Association Ltd (1953) 89 CLR 286. Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500. G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631. Love & Stewart v S Instone & Co Ltd (1917) 33 TLR 475. Masters v Cameron (1954) 91 CLR 353. Pagnan SpA v Feed Products Ltd [1987] 2 Lloyds Rep 601. Pobjie Agencies Pty Ltd v Vinidex Tudemakers Pty Ltd [2000] NSWCA 105. Rossiter v Miller (1878) 3 App.Cas 1124 Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310. Trade Indemnity Co Ltd v Workington Harbour and Dock Board [1937] AC 1 Westfarmers Bunnings Ltd v Angus & Robertson Bookworld Pty Ltd [1998] VSC 101
DECISION:	Declaration in paragraph 1 of the Amended Summons; Order in paragraph 3 of the Amended Summons; Balance of the Amended Summons and Cross Claims are dismissed.