Red Hill Iron Ltd v API Management Pty Ltd

[2012] WASC 323

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CIVIL

CITATION:   RED HILL IRON LTD -v- API MANAGEMENT PTY LTD [2012] WASC 323

CORAM:   BEECH J

HEARD:   23­26 & 30 JULY 2012

DELIVERED          :   12 SEPTEMBER 2012

FILE NO/S:   CIV 2508 of 2011

BETWEEN:   RED HILL IRON LTD

Plaintiff

AND

API MANAGEMENT PTY LTD
Defendant

Catchwords:

Contract - Farm­in agreement for exploration of mining tenements - Joint venture agreement - Proper construction - Background facts - Turns on own facts

Equity - Fiduciary relationships - Fiduciary duties - Joint venture - Whether fiduciary duty owed by manager to joint venturers - Whether fiduciary duty owed by one participant to others - Relevance of terms of contract - Scope of any duty - Turns on own facts

Legislation:

Nil

Result:

Action dismissed

Category:    B

Representation:

Counsel:

Plaintiff:     Mr P D Crutchfield SC & Mr S B Rosewarne

Defendant:     Mr C L Zelestis QC & Mr M N Solomon

Solicitors:

Plaintiff:     Tottle Partners

Defendant:     DLA Piper Australia

Case(s) referred to in judgment(s):

Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd [1999] WASC 218; (1999) 21 WAR 425

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99

Australian Securities and Investments Commission v Citigroup Global Markets Australia (No 4) [2007] FCA 963; (2007) 160 FCR 35

Birtchnell v The Equity Trustees Executors & Agency Company Ltd [1929] HCA 24; (1929) 42 CLR 384

Breen v Williams [1996] HCA 57; (1996) 186 CLR 71

Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253

Canberra Residential Developments Pty Ltd v Brendas [2010] FCAFC 125; (2010) 188 FCR 140

Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178

Chemeq Ltd v Shepherd Investments International Ltd [2007] WASCA 117

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337

Disctronics Ltd v Edmonds [2002] VSC 454

Elovalis v Elovalis [2008] WASCA 141

Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue [2011] WASCA 228

Euphoric Pty Ltd v Ryledar Pty Ltd [2006] NSWSC 2

Fazio v Fazio [2012] WASCA 72

Goldsmith v Sandilands [2002] HCA 31

Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296

Hallmark Consolidated Ltd v Centaur Mining & Exploration Ltd [2001] WASC 190

Henderson v Merrett Syndicates Ltd [1995] 2 AC 145

HML v The Queen [2008] HCA 16; (2008) 235 CLR 334

Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41

Idemitsu Queensland Pty Ltd v Agipcoal Australia Pty Ltd [1996] 1 QR 26

International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151

John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1

Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216

Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181

Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Case 60‑853

Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353

McCourt v Cranston [2012] WASCA 60

News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410

Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1

Norberg v Wynrib [1992] 2 SCR 226

Norman v FEA Plantation Ltd [2011] FCAFC 99; (2011) 280 ALR 470

Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq) [2008] WASCA 80; (2008) 36 WAR 342

Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451

Pacific Coal Pty Ltd v Idemitsu Queensland Pty Ltd (Unreported, QSC, 21 February 1992)

Permanent Building Society (in liq) v Wheeler (1992) 10 WAR 109

Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165

Price v Powers [2005] WASC 154

Reardon Smith Line Ltd v Hansen‑Tangen [1976] 1 WLR 989

Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45

Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603

Secure Parking (WA) Pty Ltd v Wilson [2008] WASCA 268; (2008) 38 WAR 350

Securities and Exchange Commission v Chenery Corporation (1943) 318 US 80

South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478

Streeter v Western Areas Exploration Pty Ltd [No 2] [2011] WASCA 17

Stubley v The State of Western Australia [2010] WASCA 36

The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165

United Dominions Corporation Ltd v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1

Vincent Nominees Pty Ltd v Western Australian Planning Commission [2012] WASC 28

Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45

Westpac Banking Corporation v The Bell Group Ltd (in liq) No 3 [2012] WASCA 157

Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530

BEECH J: 

1. Summary

1. The plaintiff (Red Hill) and the defendant (API) are joint venturers in relation to iron ore rights in some tenements in the West Pilbara.  That arose through a Farm‑in Agreement by which API could, at its election, spend money on Red Hill's tenements and earn an interest in them.  Following elections made by API, it entered into a Joint Venture Agreement with Red Hill, and API is sole funding exploration, evaluation and associated expenditure for the relevant tenements.  API is the manager of the Joint Venture.

2. Red Hill claims, in broad outline, that:

   (1)from October 2006 to June 2008, API did work investigating and studying options for rail and port infrastructure (together, transport infrastructure) that would be used (among other things) to transport ore mined from the Red Hill tenements to loading on to a ship for export;

   (2)API charged the Joint Venture for this work;

   (3)in June 2008, API decided not to further assess transport infrastructure under the Joint Venture with Red Hill, instead deciding to do it on its own account or for a different joint venture, known as the API joint venture, in which Red Hill has no interest; and

   (4)the conduct in (3) was a breach of:

   (a)the Farm‑in Agreement;

   (b)the Joint Venture Agreement;

   (c)an inferred agreement arising from the course of dealing between the parties from October 2006 to June 2008; and

   (d)fiduciary duties owed by API as manager of the Joint Venture, or as participant in the Joint Venture, arising from the agreements between the parties and from the course of dealing between them from October 2006 to June 2008.

3. API admits that it acted as summarised in (1) ‑ (3) above.  It says that it was entitled to do so.  API contends that on a proper construction of the Farm‑in Agreement and the Joint Venture Agreement:

   (1)it was entitled to make decisions in its own interests about a wide range of matters, including the decision of which Red Hill complains;

   (2)the purposes of the Joint Venture were, in broad outline, to explore, evaluate, and, if decided by the joint venturers, to develop and operate a mine on the relevant tenements.  Transportation of ore from the tenements to a port was not a purpose of the Joint Venture, unless the parties agreed.  The parties were free to pursue their own interests in deciding whether and on what terms to agree;

   (3)provisions in the agreements:

   (a)about the (confined) scope of the Joint Venture;

   (b)entitling API to act with unfettered discretion and in its own interests in deciding how to evaluate the tenements;

   (c)entitling API (and Red Hill) to freely engage in activities outside the area of the tenements the subject of the Joint Venture;

   (d)excluding fiduciary duties in specified spheres and respects;

   are inconsistent with the imposition of a fiduciary duty respecting assessment and possible development of transport infrastructure;

   (4)API owed no relevant fiduciary duty to Red Hill;

   (5)the decision not to further investigate transport infrastructure as part of the process of exploration and evaluation of the Red Hill tenements under the Joint Venture with Red Hill involved no breach of contract or fiduciary duty; and

   (6)the course of dealing between the parties from October 2006 to June 2008 did not give rise to any inferred agreement between them, and did not give rise to any fiduciary duty respecting the assessment and possible development of transport infrastructure.

4. For the reasons that follow, I accept these contentions of API, and would dismiss Red Hill's claim.

5. The most important issues are:

   (a)the proper construction of the Farm‑in Agreement and the Joint Venture Agreement;

   (b)the proper understanding of the course of dealing from October 2006 to June 2008;

   (c)whether the course of dealing gave rise to an inferred agreement; and

   (d)whether the parties' relationship arising from the instruments and the course of dealing gave rise to any relevant fiduciary duties and, if so, the scope and content of the duties.

6. The remainder of these reasons is divided into the following sections: 

   (2)Outline of the instruments [8] ‑ [74];

   (3)The course of dealing from October 2006 to June 2008:  an overview [75] ‑ [88];

   (4)Red Hill's claims:  an overview [89] ‑ [95];

   (5)Construction of the instruments:  the parties' contentions and the issues [96] ‑ [104];

   (6)Construction of the instruments:  legal principles [105] ‑ [127];

   (7)Construction of the instruments:  background facts; findings and rulings [128] ‑ [165];

   (8)Construction of the instruments:  analysis and conclusions [166] ‑ [252];

   (9)The course of dealing from October 2006 to June 2008:  findings [253] ‑ [313];

   (10)The inferred agreement claim:  analysis and conclusions [314] ‑ [331];

   (11)The fiduciary duty claim [332] ‑ [419];

   (12)Conclusion [420];

   (13)Annexure 1:  Rulings on objections [421] ‑ [484].

7. It is convenient to begin by outlining the terms of the two instruments which govern the relationship between the parties.

1. Outline of the instruments

1. As will be seen, the Farm‑in Agreement and the Joint Venture Agreement are drafted in a way that makes extensive use of definitions.  In the outline that follows, capitalised terms are defined in the agreements.  For the purposes of the outline, I do not in all respects set out the defined term.

(a)     The Farm‑in Agreement

1. On 29 November 2005, Red Hill, API, Giralia Resources NL and Guardian Resources Pty Ltd entered into a written agreement entitled 'Farm‑in Agreement - West Pilbara - Red Hill Iron Ore Project' (the Farm‑in Agreement).

2. The Farm‑in Agreement concerns mining tenements in the West Pilbara region.  At the time of entering the Farm‑in Agreement, Red Hill was the registered holder of some of the relevant mining tenements and Giralia and Guardian were the registered applicants for applications relating to other relevant mining tenements.  Giralia and Guardian had agreed, subject to their grant and obtaining the necessary ministerial approvals, to transfer and assign to Red Hill the whole of their rights, title and interest under those applications.  Red Hill agreed that API could earn an interest in the iron ore rights in relation to the Tenements on the terms of the Farm‑in Agreement:  see the recitals.  The rights granted to API were confined to rights relating to iron ore:  cl 2.1.

3. In essence, by the Farm‑in Agreement, API would, broadly at its election, fund expenditure on the Tenements and earn an interest in the iron ore rights in those Tenements.  With the exception of the initial expenditure of $600,000, the extent of funding was at API's election, and would determine the extent of the interest it earned.

4. The Farm‑in Agreement involves several phases.

   (1)Before 31 December 2006 (the expiry of the Minimum Farm‑in Expenditure Term, unless extended under cl 3.3), API had to spend at least $600,000 on the Tenements:  cl 3.1.

   (2)To earn the Initial Interest (20% of the Iron Ore Rights in the Tenements) API had to spend $2 million (including the Minimum Farm‑in Expenditure of $600,000) by solely funding Expenditure on the Tenements:  cl 4.1.  API was not obliged to spend $2 million.  It had the option of giving a notice of withdrawal under cl 4.2 at any time before earning the Initial Interest, bringing the agreement to an end.

   (3)(a)      Within 30 days of earning the Initial Interest, API could elect to form a Joint Venture with Red Hill, with API having a 20% Participating Interest in the Joint Venture Assets (including the Iron Ore Rights in relation to the Tenements):  cl 5.1(a), cl 5.1(b).  If it did not elect to form a Joint Venture, API was to withdraw from the Farm‑in Agreement and convert its 20% interest into shares in Red Hill:  cl 5.1(c), cl 5.3.  In that event, API would have no obligation to spend further funds on the Tenements.

   (b)If API elected to form a Joint Venture with Red Hill, it had two options:

   (i)One of those options was for API earn a further 40% Participating Interest (the First Further Interest) by sole funding $2 million of Joint Venture Costs (taking the cumulative total of Expenditure and Joint Venture Costs to $4 million):  cl 5.1(a), cl 5.5.  API could, at any time before earning the First Further Interest, cease its obligation to sole fund Joint Venture Costs, in which case future Joint Venture Costs would be borne by the Participants in proportion to their Participating Interests:  cl 5.6.

   (ii)The second option for API was, in effect, to proceed with the Joint Venture without sole funding future Joint Venture Costs, with the Participants bearing future costs in proportion to their Participating Interests:  cl 5.1(b), cl 5.4. 

   Upon exercising the options in cl 5.1(a) or cl 5.1(b), Red Hill and API entered into an unincorporated Joint Venture:  cl 9.1.

   (4)If API earned the First Further Interest, then within 30 days API had two options under cl 6.2.

   (a)One option was to earn a further 20% Participating Interest (the Second Further Interest), to a cumulative total Participating Interest of 80%, by sole funding all Joint Venture Costs during the Carry Phase (being the period when API exercises the option to earn the Second Further Interest and ending on the Commercial Production Date):  cl 6.2(a)(i), cl 7(a).  If API elected this option, Red Hill could, at any time prior to the Commercial Production Date, elect that Red Hill's Participating Interest convert to a 2% Royalty:  cl 7(c).

   (b)API's other option was to cease sole funding, so that future Joint Venture Costs would be borne in proportion to the respective Participating Interests:  cl 6.2(a)(ii).  If API elected this option, Red Hill had 30 days to agree to fund future Joint Venture Costs on that basis, or otherwise convert its Participating Interest to a 2% Royalty:  cl 6.3(d).

   Unlike API's options to earn the First Further Interest, by exercising the option to earn the Second Further Interest, API was committed to sole fund all Joint Venture Costs until the Commercial Production Date.  There was not an option to later cease sole funding Joint Venture Costs, other than by withdrawing from the Joint Venture under cl 16 of the Joint Venture Agreement.

   (5)Within 30 days of the Commercial Production Date (being the date on which iron ore produced from the iron ore area is first delivered to a customer under a contract of sale, and the purpose of shipment is otherwise than for sampling or testing), Red Hill must elect to either:

   (a)convert its Participating Interest to a 2% Royalty; or

   (b)contribute to all future Joint Venture Costs in proportion to its Participating Interest:  cl 7(d).

5. If API earns the Second Further Interest and Red Hill has not converted its Participating Interest to a 2% Royalty, all Carried Expenditure becomes a debt payable by Red Hill to API:  cl 7(d), cl 8.  Carried Expenditure is defined to mean 20% of all Joint Venture Costs funded by API during the Carry Phase, 20% of the reasonable costs and expenses incurred by API to procure an Offer of Finance, and interest accrued or capitalised in accordance with cl 8.3.  Red Hill's liability for Carried Expenditure is a limited recourse liability:  see cl 8.5 and cl 8.2.  It is payable only from Red Hill's Free Cash Flow.  That term is defined to mean, in broad summary, Red Hill's cash receipts from the Joint Venture, less its payments.  Further, it is only after the Commercial Production Date that Red Hill must pay any amount in respect of Carried Expenditure:  cl 8.2(a).

6. Clause 9.1 and cl 9.2 of the Farm‑in Agreement are in these terms:

   9.1Association and purpose

   With effect on and from the Formation Date [(the date on which API exercises either of the options in cl 5.1(a) and cl 5.1(b))], API and Red Hill will be deemed, subject to API's rights under this agreement, to have associated themselves together in an unincorporated joint venture in accordance with the Joint Venture Agreement for the purpose of carrying out Exploration for Iron Ore and, if so decided, Development and Mining of Iron Ore on the Tenement Area.

   9.2Joint Venture Agreement

   (a)On, or as soon as possible after, the Formation Date, API and Red Hill will enter into the Joint Venture Agreement and, subject to clause 9.2(b), with effect on and from the Formation Date API and Red Hill will be bound by the Joint Venture Agreement.

   (b)During the Sole Funding Period:

   (i)from the Commencement Date until the Formation Date, this agreement solely; and

   (ii)from the Formation Date until the expiry of the Sole Funding Period, this agreement and the Joint Venture Agreement,

   will apply to and govern and regulate the relationship of API and Red Hill in respect of the Tenements and the Iron Ore Rights.

   (c)In the event of any conflict or inconsistency between any provision of this agreement and any provision of the Joint Venture Agreement, the provisions of this agreement prevail to the extent of such conflict or inconsistency.

   (d)If:

   (i)API exercises the option in clause 5.1(a), API will be the initial Manager appointed under the Joint Venture Agreement;

   (ii)API exercises the option in clause 5.1(b), Red Hill will be the initial Manager appointed under the Joint Venture Agreement; or

   (iii)having exercised the option in clause 5.1(a), API subsequently gives a Farm‑In Cessation Notice then, with effect on the Cessation Date, API will cease to be the Manager and Red Hill will be deemed to have been appointed as the Manager under the Joint Venture Agreement.

7. 'Exploration', 'Development' and 'Mining of Iron Ore' used in cl 9.1 are defined in the Farm‑in Agreement to have the meaning defined in the Joint Venture Agreement.

8. Clause 9.2(b) applies during the Sole Funding Period, where API has elected to sole fund Expenditure or Joint Venture Costs.  Where, as here, API exercised its option to earn the Second Further Interest, the Sole Funding Period ends on the Commercial Production Date.  When API is sole funding Joint Venture Costs in order to earn the First Further Interest or Second Further Interest, the Farm‑in Agreement and the Joint Venture Agreement apply to and regulate the relationship between API and Red Hill:  cl 9.2(b)(ii).

9. Clause 9.2(c) is emphasised by Red Hill.  It is engaged by a conflict or inconsistency between a provision of the Farm‑in Agreement and a provision of the Joint Venture Agreement.  There is a corresponding provision, to the same effect, in cl 1.6 of the Joint Venture Agreement.

10. The Joint Venture Agreement is an annexure to the Farm‑in Agreement.  If API exercised either option in cl 5.1(a) or cl 5.1(b), the parties would, under the Farm‑in Agreement, become obliged to enter into the Joint Venture Agreement.  In those circumstances, as API submits, the two instruments should be construed together, and construed as at 29 December 2005, when the Farm‑in Agreement was entered.  The position is analogous to where a commercial transaction is implemented by several contracts or documents which are executed contemporaneously or within a short period.  In those latter circumstances, the documents should be read together to ascertain their proper construction:  Secure Parking (WA) Pty Ltd v Wilson [2008] WASCA 268; (2008) 38 WAR 350 [87].

1. I will explain the effect of cl 9.3(b) when I outline the provisions of the Joint Venture Agreement.

2. Clause 10.4 is in the following terms:

   10.4Exploration and indemnity

   (a)Each Relevant Owner, severally in respect of each Tenement in which it holds any registered interest, grants to:

   (i)API, prior to the Formation Date, at API's sole cost and risk;

   (ii)on and from the Formation Date and until the expiry of the Sole Funding Period, the Manager, in accordance with the Joint Venture Agreement, at API's sole cost and risk; and

   (iii)on and from the expiry of the Sole Funding Period, the Manager, in accordance with the Joint Venture Agreement, at the Participants' sole cost and risk,

   the sole and exclusive right to carry out:

   (iv)Exploration for Iron Ore on the Tenements; and

   (v)if so decided by the Management Committee pursuant to the provisions of clause 15 of the Joint Venture Agreement, Development and Mining of Iron Ore on the IO Tenements.

   (b)Each Relevant Owner acknowledges and agrees that subject to this agreement and the Joint Venture Agreement, the nature, timing and conduct of all:

   (i)Exploration on or of the Tenements during the Sole Funding Period will be at the sole discretion of API; and

   (ii)Development and Mining on or of the IO Tenements will be at the sole discretion of the Participants in accordance with the Joint Venture Agreement,

   provided that such Exploration, Development and Mining must be carried out in accordance with good mining practice and in compliance with all laws and conditions applicable to the Tenements.

   (c)API irrevocably and unconditionally undertakes and agrees to indemnify each Relevant Owner and their respective directors, officers and employees against any Liability (including legal fees) that they may suffer, incur or sustain as a result of any breach:

   (i)by API of its obligations under this agreement during the Sole Funding Period; and

   (ii)by the Manager of its obligations under the Joint Venture Agreement between the Formation Date and the expiry of the Sole Funding Period,

   except to the extent that the Liability was caused by any act, default or omission, (including negligence, breach of contract, or breach of statute) of the Relevant Owner or its officers, directors, employees, agents or contractors.

3. API particularly emphasises that by cl 10.4(b)(i), the nature, timing and conduct of all Exploration (as defined) on or of the Tenements during the Sole Funding Period will be at the sole discretion of API.  Further, by cl 10.4(a), as Manager, API has the sole and exclusive right, at its sole cost and risk, to carry out all exploration and evaluation on or of the Tenements.

4. API also relies heavily on cl 10.9 and cl 10.10.  Those clauses are in the following terms:

   10.9Activities outside the Tenements

   (a)Without limiting the rights of the OMR Holder within the Tenement Area, but subject to clause 10.9(b), each party will have an unrestricted right to engage in and receive full benefit of activities outside the Tenement Area (whether or not such activities may be in competition with the Joint Venture or any other party) without consulting the other parties or being obliged to offer the other parties the opportunity to participate in such activities.  For the avoidance of doubt, in conducting such activities each party may use Mining Information.

   (b)If API, Red Hill, Giralia or Guardian of any of their respective Related Bodies Corporate acquires an interest in any mining tenement (other than a Tenement) within the Tenement Boundaries (the Project Area Interest), that party must offer, or must ensure that its Related Body Corporate offers, the Project Area Interest to the Principal Parties to be held subject to the terms of this agreement and the Joint Venture Agreement, such that:

   (i)with effect on and from the Formation Date, API and Red Hill hold:

   (A)registered interests in the Project Area Interest; and

   (B)interests in any Iron Ore Rights (but not in relation to Other Mineral Rights) in relation to the Project Area Interest,

   in proportion to their respective Participating Interests from time to time; and

   (ii)subject to entering into an agreement with API and Red Hill pursuant to which it agrees to comply with the obligations of the OMR Holder under this agreement, the relevant party, or its Related Body Corporate, retains all rights under the Project Area Interest in respect of Other Minerals.

   10.10Exclusion of Fiduciary Duties

   Notwithstanding anything to the contrary in this agreement or the Joint Venture Agreement, during the Sole Funding Period, in exercising its rights under this agreement, including:

   (a)the determination of the location and manner of Exploration;

   (b)the amount of Expenditure or Joint Venture Costs to be incurred; and

   (c)the exercise of any discretion as to whether to withdraw from this agreement, exclude any Tenement, cease to sole fund activities or to earn any further interest,

   API may exercise those rights in its absolute discretion and in its own interests (unless this agreement expressly provides otherwise), and API will not be subject to fiduciary duties in favour of Red Hill in respect of the exercise of those rights.

5. Clause 10.10 expressly states that the determination of the location and manner of Exploration is a matter in respect of which API may act solely in its own interests (except to the extent the Farm‑in Agreement expressly provides otherwise) and is not subject to any fiduciary duty in favour of Red Hill.  In that respect, API invites attention to the breadth of the definition of Exploration. 

6. Further, cl 10.9(a) gives each party an 'unrestricted right' to conduct and receive the full benefit of activities outside the tenement area, whether or not in competition with the Joint Venture, without consulting the other parties.

(b)     The Joint Venture Agreement

1. As I have said, the Joint Venture Agreement, in an unexecuted form, is an annexure to the Farm‑in Agreement, and is to be construed as at December 2005.

2. On 16 October 2006, API earned the Initial Interest (of 20%).  It also exercised its option to acquire the First Further Interest, and the Joint Venture was formed between Red Hill and API under cl 9 of the Farm‑in Agreement.

3. On 29 December 2006, API earned the First Further Interest, taking its Participating Interest to 60%.  It also exercised its option to acquire the Second Further Interest (another 20%) and become liable to sole fund all Joint Venture Costs during the Carry Phase (exhibit A96).

4. On 10 January 2007, Red Hill and API executed the Joint Venture Agreement with effect from 16 October 2006:  cl 3.1.  The executed Joint Venture Agreement was in the form annexed to the Farm‑in Agreement.

5. By cl 3.1, with effect from the Formation Date (namely 16 October 2006) Red Hill and API associated themselves together in an unincorporated Joint Venture for the purpose of carrying out Exploration for Iron Ore and, if so decided in the manner provided in the Joint Venture Agreement, Development and Mining of Iron Ore within the IO Area.  It is common ground that the reference in cl 3.1 to 'if so decided in the manner provided' in the Joint Venture Agreement, is a reference to the parties deciding in the manner provided in cl 15, to which I will refer.

6. The IO Area is defined, in effect, to mean the area which is subject to those of the Tenements that permit the holder to exercise Iron Ore Rights.

7. The Joint Venture Activities are limited to Iron Ore and the exercise of Iron Ore Rights:  cl 2.1.

8. Iron Ore Rights are the rights in relation to a Tenement, but limited solely to Iron Ore and excluding the exercise of rights in relation to all minerals other than Iron Ore.  Subject to the terms of the Tenement and the Mining Act 1978 (WA), Iron Ore Rights include the rights to prospect for, explore for, mine, process, beneficiate, transport, store, offer for sale, sell or otherwise deal with Iron Ore.

9. Exploration is defined to include all activities and operations directed towards the exploration for, or discovery, location and delineation of, commercial Iron Ore bodies within the Tenement Area, the evaluation of such ore bodies including feasibility, viability and amenability studies, the acquisition, maintenance and administration of the Tenements and the administration of field offices for the performance of such activities and operations.

10. Development is defined to mean the design, construction and commissioning of a mine and related facilities for the conduct of Mining. 

11. Mining is defined to mean all work of or associated with extraction of Iron Ore deposits, including all preparatory development and incidental work other than Exploration and, to the extent agreed by the parties, may also include extraction, beneficiation, transportation, refining, processing and marketing of Iron Ore produced from within the IO Area.

12. As emphasised by API, it can be seen from the definition of Mining that, like other purposes such as refining, processing and marketing, transportation of Iron Ore was included only to the extent agreed by the parties.

13. Clause 3.9 provides that the parties do not intend to create a partnership or, except as otherwise provided, to establish any Participant as an agent of any other Participant.

14. By cl 3.10, each Participant in the Joint Venture promises to act in good faith towards the other Participants including:

    (a)being just and faithful in all activities and dealings with the other Participants;

    (b)attending diligently to the conduct of all activities in relation to the Joint Venture in which the Participant is involved; and

    (c)accounting promptly for all funds, including negotiable instruments, received by it on behalf of the Joint Venture.

15. Red Hill claims that, by the conduct of which it complains, API breached its obligations under cl 3.10.

16. Clause 3.11 provides that unless the Participants in the Joint Venture otherwise agree, the Joint Venture is limited to the purposes set out in cl 3.1 and is not to be extended by implication or otherwise.  API emphasises this clause.  The parties advance competing constructions of what is encompassed by the words in cl 3.11 of 'the purposes set out in clause 3.1'. 

17. By cl 3.12, nothing contained or implied in the Joint Venture Agreement restricts in any way the freedom of a Participant or a Related Body Corporate of a Participant to conduct as it sees fit any other business or activity outside of the Tenement Area, without any accountability to the other Participants and whether or not that other business activity is in competition with the Joint Venture Activities or the business or activities of any other Participant.  That substantially mirrors cl 10.9 of the Farm‑in Agreement.

18. By cl 4.1, API was appointed Manager of the Joint Venture.  By cl 4.2, the Manager is obliged to manage, supervise and conduct Joint Venture Activities on behalf of the Participants as their agent, in accordance with the Joint Venture Agreement and Programmes and Budgets approved from time to time, with the standard of diligence and care normally exercised by duly qualified and experienced persons in the performance of comparable work, and in accordance with good Exploration, Development and Mining methods, procedures and practices.

19. For that purpose, the Manager is empowered to exercise all powers, authorities and discretions in relation to the management and carrying on of Joint Venture Activities:  cl 4.2(g).

20. Joint Venture Activities is defined to mean Exploration, Development and Mining within the Tenement Area, and all associated activities, after the Formation Date.

21. Clause 4.3 details activities to be carried on by API as Manager of the Joint Venture.  Among other things, it requires the Manager to do the following:

    (a)the preparation and presentation to the Management Committee any evaluation or Feasibility Studies;

    …

    (c)the payment, on behalf of the Participants, of all Joint Venture Costs incurred in connection with Joint Venture Activities;

    (d)all negotiations for agreements with third parties relating to the conduct and operation of the Joint Venture Activities;

    …

    (f)the maintenance, operation and protection of all other Joint Venture Assets in the Manager's control or custody;

    …

    (h)the engagement, dismissal, supervision and control of employees, agents, independent contractors, competent experts, advisers, superintendants and engineers;

    …

    (m)the doing of all other acts and things as may be necessary or advisable for efficient and economic Joint Venture Activities.

22. Joint Venture Costs means, broadly, all costs, charges and expenses incurred by the Manager in connection with Joint Venture Activities. 

23. Clause 4.5 concerns a change in the office of Manager.  It provides that API will continue as Manager until:

    (a)an event occurs which means that under the Farm‑in Agreement, API ceases to be Manager;

    (b)API relinquishes the office of Manager by notice to the Management Committee;

    (c)the date on which API's Participating Interest becomes less than that of any other Participant;

    (d)an insolvency event occurs in respect of API; or

    (e)the Management Committee gives notice of removal.

24. By cl 4.8, the Manager has no authority to act for or to assume any obligation or liability on behalf of the Participants except as is conferred on the Manager by the Joint Venture Agreement or the Management Committee.

25. By cl 4.9, in performing its duties and obligations and exercising its rights and authorities, the Manager must act as the agent of the Participants severally, in proportion to their Participating Interests.

26. By cl 4.10, the Participants indemnify the Manager for any liability incurred in the discharge of its duties, with exceptions for bad faith, gross negligence or wilful misconduct.

27. Clause 4.15 requires the Manager to keep the Management Committee advised of all Joint Venture Activities by submitting in writing to the Management Committee a report after completion of the annual Programme and Budget which includes comparisons between actual and budgeted Joint Venture Costs and comparisons between the objectives and results of the Programme and Budget. 

28. By cl 4.16, the Manager is required to provide the members of the Management Committee with access to all information acquired or prepared in the undertaking of Joint Venture Activities.

29. Clause 4.17 requires the Manager to provide Participants with quarterly reports describing Joint Venture Activities, itemising Joint Venture Costs and describing planned Joint Venture Activities.

30. Clause 4.18 requires that the Manager's reports under cl 4.15 and cl 4.17 must be sufficient to enable each Participant to comply with its obligations of continuous disclosure as listed entities.

31. By cl 5, a Management Committee is formed, comprising representatives from the Participants, to control and direct the business and affairs of the Joint Venture.  Each Participant may appoint a number of representatives, in accordance with its Participating Interest:  cl 5.2.

32. Clause 5.6 provides that, except as otherwise provided in the Joint Venture Agreement, the Management Committee is to decide all matters in relation to the business and affairs of the Joint Venture including, among other things, approval and revision of Programmes and Budgets.  Clause 5.6 also provides that all decisions of the Management Committee bind the Participants and each Participant agrees to give effect to those decisions.  Only one representative appointed by each Participant can vote at Management Committee Meetings and they are entitled to a number of votes equal to the Participating Interest of the party they represent:  cl 5.8(a), cl 5.8(b).  Except where unanimity is specified, the Management Committee determines matters by majority vote:  cl 5.8(c).

33. When the Joint Venture was formed, API had a 20% Participating Interest and would be entitled to one representative on the Management Committee (to Red Hill's four representatives).  The effect of cl 9.3(b) of the Farm‑in Agreement, read with cl 5 of the Joint Venture Agreement, is that once API exercises its option under cl 5.1(a) of the Farm‑in Agreement to earn the First Further Interest, it gains control of the Management Committee.  This is achieved by acting as if API had already earned the First Further Interest:  giving it 60% of the voting rights of the Management Committee and by API appointing two representatives to replace those of Red Hill.

34. Clause 7.2 requires that all Joint Venture Activities are to be carried out in accordance with an approved Programme and Budget.  The Manager is to prepare and deliver annual Programmes and Budgets in accordance with the Joint Venture Agreement:  cl 7.1.  Clause 7.3 sets out detail about what must be provided in the proposed Programme and Budget.

35. Clause 7.4(a) requires the Participants to ensure that the Management Committee votes upon any proposed Programme and Budget (or a revision of that) within 30 days of receipt.  By cl 7.4(b), the Management Committee may approve a Programme and Budget as submitted, require revisions or give unconditional or conditional approval in respect of particular items.  By cl 7.5, the Programme and Budget as approved is binding on the Manager, who must then promptly carry on Joint Venture Activities and spend money in accordance with the Programme and Budget.  See also cl 4.2.

36. One issue between the parties relates to the reconciliation of cl 7 of the Joint Venture Agreement with cl 10.4(b) of the Farm‑in Agreement.  The latter states that the nature, conduct and timing of Exploration during the Sole Funding Period is at the sole discretion of API.  On the face of it, that is not consistent with the need for a Programme and Budget to be submitted to the Management Committee for approval.  I will explain in section 8 of these reasons how I think these provisions are to be reconciled.

37. By cl 8.1, generally, all Joint Venture Costs are to be borne by the Participants in proportion to their Participating Interests. 

38. I accept API's submission (not disputed by Red Hill) that cl 8 and cl 9 of the Joint Venture Agreement are inconsistent with the provisions of the Farm‑in Agreement that apply during the Sole Funding Period (ts 268).

39. Clause 10 of the Joint Venture Agreement provides that each Participant will have the obligation to receive in kind and to dispose of separately its Participating Interest of all Production.

40. Clause 15.1 provides that if and whenever the Management Committee (by majority) so determines, the Manager must carry out a Feasibility Study in relation to a proposed Development.  The Management Committee is to determine the precise scope of the Feasibility Study, which is to be appropriate having regard to the nature and extent of the proposed Development:  cl 15.1(b).

41. Feasibility Study is defined to mean a feasibility study or studies into the establishment of a mine or mines within the IO Area which:

    (a)establishes ore reserves and mineral resources of Iron Ore and which examines the technical, economic and financial aspects of developing and operating a mine or mines within parameters determined by the Management Committee, including the transportation of Iron Ore to the point of loading onto ships, based on such ore reserves and resources;

    (b)contains or refers to, and is based on, all necessary supporting technical reports and data covering geological, geotechnical, engineering, metallurgical and infrastructure parameters and estimates of capital and operating costs;

    (c)recommends the development and operation of a mine or mines within the IO Area; and

    (d)is otherwise in such detailed and comprehensive form satisfactory to enable financial institutions to make a decision whether to advance funds for the development and operation of a mine or mines within the IO Area.

1. It can be seen from cl 15 and the definition of Feasibility Study that transportation of ore to the point of loading onto ships was part of what would be examined by the Manager in any Feasibility Study.  By cl 15.1, such a study would be conducted by the Manager when and if it was requested by the Management Committee.

2. By cl 15.2(a), following completion of a Feasibility Study and its consideration by the Management Committee, the Management Committee may require the Manager to submit a proposal for Development and Mining (Development Proposal).

3. By cl 15.2(c), a decision to approve a Development Proposal requires the unanimous vote of the Management Committee.

4. If the Management Committee does not unanimously approve a Development Proposal, but at least 50% of votes were in favour of, then the Participants who voted in favour of it each have a right to purchase the Participating Interest of each Participant who voted against it:  cl 15.3.  The fair market value of the interest is to be determined by an independent expert who applies the valuation standards of the Australasian Institute of Mining and Metallurgy (the VALMIN Code):  cl 15.3(b), cl 15.3(c), cl 22.8.  The VALMIN Code was sought to be tendered by API and objected to by Red Hill on grounds of relevance.  I overrule the objection and admit exhibit A60.  The document is relevant to API's construction argument about what can be drawn from cl 15 about the scope of Joint Venture purposes.  (As I explain in section 8, in the end I do not put any weight on the argument).

5. By cl 15.4, if the Management Committee decides to proceed with the Development, the Participants must, if one of them requests, promptly negotiate in good faith such amendments to the Joint Venture Agreement as they may consider necessary for the Development and the conduct of Mining, but, failing agreement on any amendments within stipulated time periods, the Joint Venture Agreement will continue to govern the relationship of the Mining Participants for the Development and the conduct of Mining.

6. By cl 16.1, each Participant is given a right at any time by written notice to the other Participants to elect to withdraw from the Joint Venture at the conclusion of the term of the then current budget.  The effect of withdrawing from the Joint Venture is that that Participant ceases to have any rights or interest in the Joint Venture Assets and the IO Tenements.

7. Clause 18 imposes obligations of confidentiality in respect of various information detailed in cl 18.1, and defined as Confidential Information.  It includes Mining Information, all reports, data and studies made in the conduct of Joint Venture Activities, and any other information obtained in the course of the Joint Venture or during the negotiations preceding it.

8. By cl 18.6, a Participant conducting activities of the type referred to in cl 3.12 is permitted to use Confidential Information for the purposes of those activities.

9. As stated in section 1, Red Hill complains of a decision by API in June 2008 to assess transport infrastructure, not as part of the Joint Venture with Red Hill, but as part of the API joint venture.  The API joint venture, also managed by API, is a joint venture between Aquila Resources Ltd (Aquila) and American Metals and Coal International Inc (AMCI), through their respective subsidiaries, which are the shareholders in API.  Red Hill has no interest in the API joint venture.  Red Hill claims, among other things, that the decision by API to assess transport infrastructure outside the Joint Venture was in breach of the Farm‑in Agreement and the Joint Venture Agreement.  It is convenient to provide an overview of the course of dealing of the parties from October 2006 to June 2008, before outlining Red Hill's case and the parties' competing construction of the Farm‑in Agreement and Joint Venture Agreement.

1. The course of dealing from October 2006 to June 2008:  an overview

1. The facts relating to the parties' course of dealing on which Red Hill relies are set out in pars 18 ‑ 41 of the statement of claim.  I will make detailed findings about those matters later in these reasons.  This overview is intended to set the context for explaining Red Hill's case and the issues of construction which arise.  This overview is subject to the more detailed findings later in these reasons.

2. Broadly, Red Hill relies upon:

   (a)the October 2006 Budget for the Joint Venture, presented at the December 2006 meeting of the Management Committee (pars 18 ‑ 23);

   (b)the April 2007 Budget presented at the June 2007 meeting of the Management Committee (pars 25 ‑ 30);

   (c)the contents of a PowerPoint presentation presented at the December 2007 meeting of the Management Committee (pars 31 ‑ 33);

   (d)the contents of a pre‑feasibility study completed on or about 2 May 2008 (pars 34 ‑ 35);

   (e)the fact that from October 2006 until June 2008 API, as Manager of the Joint Venture, incurred expenses relating to the investigation of rail infrastructure and port infrastructure (par 36), which was included in Programmes and Budgets, and reflected in the loan balance provided by API to Red Hill and, consequently, was work undertaken by API as agent for the Participants in the Joint Venture (pars 36 ‑ 37); and

   (f)the fact that API, in its capacity as Manager of the Joint Venture, entered into an access and consent deed with some third parties (par 36A).

3. In November 2006, API gave notice to Red Hill of the first Management Committee meeting of the Joint Venture (exhibit A87).  Item 3 on the enclosed agenda was a Programme and Budget for the period to June 2007.  With those papers was included a document entitled 'Australian Premium Iron - Red Hill Iron Ore Joint Venture - Proposed Exploration Budget to June 2007' (the October 2006 Budget).

4. Red Hill pleads (par 21), and I accept, that the October 2006 Budget contained:

   (a)a statement that the identification of the optimum port/beach head location was critical;

   (b)a statement that the project definition included mining method and ore processing requirements, transport corridor, transport system, port location and ship loading technique;

   (c)a statement that the proposed budget included provision for costs associated with the study of development options described as 'mining/infrastructure';

   (d)a statement that Kevin Watters, an officer of API, had been appointed to advance studies on the project's development options and that preliminary work had been undertaken and required a dedicated resource to advance; and

   (e)provision for amounts related to the study of options to develop rail and port infrastructure options for the transport and loading of iron ore produced by the Joint Venture.

5. API does not dispute that the October 2006 Budget contains these statements, but contends that they must be seen in a proper context.  In a nutshell, API says that these statements (and the later statements relied on by Red Hill) were evidently made in the context of a proposed study of a wider project, of which the tenements the subject of the Joint Venture formed only a part, and were not made in the context of a study about the (Red Hill) Joint Venture alone.  In section 8 of these reasons, I will explain why I accept that contention.

6. At the Management Committee meeting on 14 December 2006, Mr Watters discussed the rail infrastructure and port infrastructure options which were then under consideration.

7. On or about 5 June 2007, API sent to Red Hill a document entitled 'Red Hill Joint Venture - Development and Exploration Budget - Period July 2007 to 2008' (the April 2007 Budget) (exhibit A132).  Red Hill pleads (par 28), and I accept, that the April 2007 Budget relevantly contained:

   (a)a statement that the total amount of the proposed exploration and development budget for the Joint Venture for the 2007/2008 year was $25,960,000, of which $2,490,000 was proposed to comprise exploration costs, $21,110,000 was proposed to comprise development costs, and $2,360,000 was proposed to comprise administration costs;

   (b)a statement that the determination of the location of the port to be used for the purpose of shipping iron ore from the Joint Venture was critical to the project timeline;

   (c)a statement that a study prepared and presented by external consultants in January 2007 determined locations referred to as Cape Preston and Dixon Island to be the best alternative options for the location of a port;

   (d)a statement that the April 2007 Budget contained provision for the further investigation of both the Cape Preston and Dixon Island locations;

   (e)a statement that a road or rail transport route for the transport of ore to Cape Preston had been determined, which route also included a possible extension to Dixon Island;

   (f)a statement that the April 2007 Budget contained provision for the further assessment of both the road and rail options for transport of ore;

   (g)a statement that options for the transport of iron ore from pit to process plant, mine transport corridors, run of mine and product stockyards, equipment and process options for stacking and reclaiming iron ore and for train loading and dry and wet processing plants would be evaluated; and

   (h)a statement that of the $21,100,000 allocated to development costs in the April 2007 Budget, $1,620,000 was allocated to the costs of the further assessment of mine infrastructure, $2,990,000 to the costs of the further assessment of the appropriate transport infrastructure including rail infrastructure, and $3,350,000 to the costs of the further assessment of port infrastructure.

8. Again, the context of these statements is in issue.

9. At the Management Committee meeting of the Joint Venture on 20 June 2007, the April 2007 Budget was presented.

10. The Management Committee met again on 7 December 2007.  At that meeting, Mr Tuckey, manager of exploration at API, presented a review of exploration activity in the form of a PowerPoint presentation.  Part of that presentation outlined options for the development of port infrastructure at Dixon Island and Cape Preston (exhibit A165, pages 2669 ‑ 2682).

11. On or about 2 May 2008, API completed a pre‑feasibility study (the PFS) in relation to what was described as the 'West Pilbara Iron Ore Project'.  The (Red Hill) Joint Venture Tenements and the neighbouring tenements of the Mt Stuart joint venture (in which API, but not Red Hill, has an interest with Cullen Resources Ltd) form part of the West Pilbara Iron Ore Project.  Red Hill pleads (par 35), and I accept, that the PFS included, among other things:

    (a)an analysis of port infrastructure options, including capital and operating costs; and

    (b)an analysis of rail infrastructure options, including capital and operating costs.

12. Red Hill also pleads that the PFS contained:

    (a)an analysis of the expected yield of the (Red Hill) Tenements, and of one deposit on the Mt Stuart tenements, which analysis showed that the (Red Hill) Joint Venture Tenements comprised over 80% of the total anticipated yields of the eight deposits the subject of the PFS; and

    (b)a financial analysis assessing the viability of the (Red Hill) Tenements and the deposit of the Mt Stuart joint venture, which financial analysis included capital and operating costs of rail infrastructure and port infrastructure.

    I will say more about that in section 8.

13. On or about 26 June 2008, API provided a budget for the Joint Venture for the period July 2008 to June 2009 (the June 2008 Budget).  In the June 2008 Budget, API made no provision for the further assessment or development of transport infrastructure and stated that it intended to develop rail and port infrastructure, not as a Joint Venture Activity, but on its own account or through the API joint venture.  API's accompanying letter of 26 June 2008 stated that API would be preparing a definitive feasibility study for the West Pilbara Iron Ore Project stage 1 and that that study would be progressed in two parts, with API funding the transport infrastructure, and the Joint Venture funding its apportioned costs of mining and mine infrastructure.  The letter also stated that API was progressing the transport infrastructure to ultimately provide for shared use by other projects in which API has a joint venture interest, and also to provide for third party use in accordance with government requirements.  Subsequently, despite demand by Red Hill, API has maintained this position.

14. It is that decision which is the cause for Red Hill's claims in this action.  I will give a broad outline of the claims made by Red Hill, before explaining the issues of construction of the Joint Venture Agreement and Farm‑in Agreement that arise.

1. Red Hill's claims:  overview

1. Red Hill claims that API's decision not to progress further assessment or development of rail infrastructure or port infrastructure as a Joint Venture Activity on behalf of the Participants, but to do so on its own account or on behalf of the API joint venture, was a breach of:

   (a)clause 4.2 of the Joint Venture Agreement, by which the Manager is obliged to conduct Joint Venture Activities on behalf of the Participants;

   (b)clause 7(a) of the Farm‑in Agreement, by which API was obliged to sole fund all Joint Venture Costs until the Commercial Production Date;

   (c)API's duty to act in good faith under cl 3.10 of the Joint Venture Agreement; and

   (d)an implied term of the Joint Venture Agreement that API would not take for itself or any other third party any opportunity which was a Joint Venture Asset, and would not pursue on its own behalf, or on behalf of any third party any activity which was a Joint Venture Activity.

2. Further or alternatively, Red Hill claims that by reason of the conduct and communications referred to in pars 18 ‑ 23 and pars 25 ‑ 36 of the statement of claim, being that outlined in section 3 above, there was an inferred agreement between the parties that the investigation and, if approved by the Management Committee, subsequent development of rail infrastructure and port infrastructure were Joint Venture Activities for the purposes of the Joint Venture Agreement (par 50).

3. Finally, Red Hill claims that the conduct of which it complains is in breach of fiduciary duties owed by API to Red Hill.  The claim of breach of fiduciary duty was the primary focus of Red Hill's written and oral submissions at trial.  Red Hill claims that API owes it fiduciary duties as Participant (statement of claim par 57) and as Manager (par 57A).  The content of the duties are pleaded in equivalent terms in the two paragraphs.  I will set out the alleged content in section 11.

4. The matters said to give rise to the fiduciary duty as Participant are:

   (a)the negotiations leading up to the signing of the Farm‑in Agreement;

   (b)the provisions of the Farm‑in Agreement;

   (c)the fact that API and Red Hill are the Participants in the Joint Venture pursuant to the Joint Venture Agreement;

   (d)the provisions of the Joint Venture Agreement; and

   (e)the course of dealing between the parties pleaded in pars 18 ‑ 41 of the statement of claim.

5. The matters said to give rise to the duty owed as Manager are:

   (a)that API held the office of Manager of the Joint Venture pursuant to the Joint Venture Agreement;

   (b)the provisions of the Joint Venture Agreement; and

   (c)the course of dealing between the parties pleaded in pars 18 ‑ 41 of the statement of claim.

6. Red Hill pleads that the opportunities to further assess and develop transport infrastructure are opportunities connected with the Joint Venture (par 57C).  That is said to be so by reason of definitions and provisions of the Joint Venture Agreement, and the course of dealing between the parties pleaded in pars 18 ‑ 41.

7. Red Hill pleads (par 58) that in acting as it did on 26 June 2008 and thereafter, as summarised in [87] above, API breached its fiduciary duties.

1. Construction of the instruments:  the parties' contentions and the issues

1. As will appear, the parties put diametrically different constructions of the Farm‑in Agreement and the Joint Venture Agreement.

(a)     Red Hill's construction

1. Red Hill does not contend that API is or was obliged to investigate and develop transport infrastructure options.  Rather, Red Hill's contention is that, if those matters are to be pursued by API, they must be pursued only through the Joint Venture.  Further, the costs of the assessment and, if warranted, development of transport infrastructure are part of the Joint Venture Costs that must be sole funded by API pursuant to cl 7(a) of the Farm‑in Agreement.

2. Among Red Hill's main contentions about the construction of the instruments are the following.

   (1)The combined effect of cl 3.1, cl 15.1 and cl 15.2 of the Joint Venture Agreement (read with the definitions of Feasibility Study and Exploration) is that assessment of options for transport infrastructure is an inevitable part of the Manager's role.  It is within the scope of the studies contemplated in the definition of Exploration.  Further, a Development Proposal is required before there is a decision to proceed to Development and Mining.  The Development Proposal must be preceded by a Feasibility Study.  A Feasibility Study must examine transportation of iron ore to the point of loading onto ships as an element of the technical, economic and financial aspects of developing and operating a mine (ts 36, 58).

   (2)The reference to 'transportation' in the definition of Feasibility Study is a reference to the capital cost of transportation (ts 465 ‑ 466).

   (3)Accordingly, assessment of transport infrastructure options is and was, at all times, a Joint Venture Activity.

   (4)Alternatively to (3), assessment of transport infrastructure options was the subject of approved Programmes and Budgets.  For that reason, it became a Joint Venture Activity (ts 98).

   (5)API has breached cl 4.2 of the Joint Venture Agreement by managing, conducting or supervising a Joint Venture Activity, namely the assessment of transport infrastructure, on its own account and not on behalf of the Participants in the Joint Venture (ts 97, 163 ‑ 164).

   (6)By asserting that the assessment of transport infrastructure is not (henceforth) a Joint Venture Activity, and thereby ceasing to fund it in its capacity as Participant or Manager in the Joint Venture, API has breached cl 7(a) of the Farm‑in Agreement.  On a proper construction of cl 7(a), although API is not obliged to spend money on the assessment of transport infrastructure, API is not permitted to spend money on that subject apart from in its capacity as Participant or Manager of the Joint Venture (ts 96 ‑ 97, 163, 166 ‑ 167, 472).

   (7)The Joint Venture Agreement contains implied terms that API would not:

   (a)take for itself or any third party any opportunity which was a Joint Venture Asset; and

   (b)pursue on its own behalf or on behalf of any third party any activity which was a Joint Venture Activity.

3. In support of its fiduciary claim, Red Hill advances the following constructions:

   (a)even if, contrary to Red Hill's primary submission on its contractual case, the assessment and possible development of transport infrastructure is not a purpose of the Joint Venture, it is a contemplated purpose, given the matters summarised in (1) above and the provision, in the definition of Mining, contemplating that the parties might so agree;

   (b)consequently, opportunities associated with the assessment and possible development of transport infrastructure are opportunities of the Joint Venture or within the scope of the possible business of the Joint Venture;

   (c)in construing the instruments it is important to distinguish between API as a Participant and API in its role as the Manager of the Joint Venture;

   (d)questions about the Manager's powers and duties are answered by reference to the Joint Venture Agreement.  Those powers and duties are not to be read as subject to the provisions of the Farm‑in Agreement.  Accordingly, the obligations of the Manager in deciding what Exploration to do are not affected by cl 10.4(b) of the Farm‑in Agreement;

   (e)the decision by the Manager to pursue (or not) the assessment of transport infrastructure options does not involve API exercising its rights under the Farm‑in Agreement;

   (f)the Manager must conduct Joint Venture Activities in accordance with an approved Programme and Budget as required by cl 7.2 of the Joint Venture Agreement.  Nevertheless the Manager is empowered to exercise some broader discretions and powers (see cl 4.2 of the Joint Venture Agreement);

   (g)clause 10.9 of the Farm‑in Agreement and cl 3.12 of the Joint Venture Agreement relate only to Participants, and not the Manager, and give no rights to the Manager to compete with the Joint Venture which it is managing.  Further, those provisions relate only to activities outside the Tenement Area, and do not mention business opportunities;

   (h)clause 10.10 of the Farm‑in Agreement, which excludes fiduciary duties, only applies to API as a Participant, and does not apply to the Manager or qualify API's obligations as Manager under the Joint Venture Agreement.  Further, notwithstanding that cl 10.10 says that it applies during the Sole Funding Period (and so up to the Commercial Production Date), cl 10.10(a) only applies before the Formation Date.  Once the Joint Venture comes into existence, the determination of the location and manner of Exploration is a matter for the Manager under and in accordance with the Joint Venture Agreement;

   (i)whatever else cl 10.4 and cl 10.10 of the Farm‑in Agreement may mean, they do not permit API to say that what it had previously determined was a Joint Venture Activity is no longer part of what it would do under the Joint Venture, but that API would proceed to do it outside the Joint Venture (ts 162 ‑ 163, 169, 462, 467, 472).

(b)     API's construction

1. API accepts that, to the extent it studied transport infrastructure in October 2006 to June 2008, that evaluation was within the definition of Exploration, and so was a Joint Venture Activity.  But API submits that that fact does not compel it to continue to assess transport infrastructure, much less to develop it, within the Joint Venture, at its sole cost and risk.  Rather, API submits it remains free to make decisions about these matters in its own interests. 

2. API challenges almost every one of Red Hill's contentions about the construction of the agreements.

3. By way of overview, API makes the following contentions.

   (1)The purposes of the Joint Venture are confined to the exploration and evaluation of the iron ore potential of the Tenements, and the development and operation of the possible mining of iron ore on those tenements.  The purposes do not include processing, transportation or marketing of iron ore.  The Joint Venture Agreement expressly provides that each of those possible purposes can only become a Joint Venture purpose if the parties so agree.

   (2)The accepted fact that export of any iron ore deposits produced from the Tenement Area requires access to some form of transport to a port does not justify construing the instruments as revealing an intention that that requirement was to be satisfied by the joint venturers undertaking the (enormous) enterprise of development and operation of rail and port infrastructure.

   (3)The reference to 'transportation' in the definition of Feasibility Study is to the parties' joint use of transportation, not to their joint development, ownership and operation of transport infrastructure.

   (4)The provisions in the Farm‑in Agreement and Joint Venture Agreement giving the parties complete freedom to engage in activities and businesses outside the Tenement Area reinforce the view that the omission of the purpose of development, ownership and operation of transport infrastructure was deliberate.

   (5)The commercial opportunities to be exploited by the Joint Venture do not extend beyond the purposes of the Joint Venture unless, and to the extent, and upon the terms that, the Participants expressly agree to extend the Joint Venture purposes.

   (6)API's duty of good faith under cl 3.10 of the Joint Venture Agreement does not extend the Joint Venture purposes to development of transport infrastructure.

   (7)Under the Farm‑in Agreement, API was solely responsible for funding exploration and evaluation of the Tenements.  Further, it was expressly entitled to determine how the evaluation would be undertaken and to act in its own interests in that regard (cl 10.4(b)(i), cl 10.10(a) and cl 10.10(b)). 

   (8)During the Sole Funding Period, the clauses of the Joint Venture Agreement requiring Joint Venture Activities to be carried out in accordance with a Programme and Budget approved by the Management Committee have no operation.  They are inconsistent with cl 10.4 of the Farm‑in Agreement (see cl 9.2(c) of the Farm‑in Agreement and cl 1.6 of the Joint Venture Agreement).

   (9)API's right to determine the nature, timing and conduct of exploration and evaluation entitled it to evaluate the Joint Venture Tenements in conjunction with other tenements in which API, but not Red Hill, had an interest.

   (10)Clause 10.9(a) of the Farm‑in Agreement and cl 3.12 of the Joint Venture Agreement are inconsistent with the imposition of fiduciary duties which could inhibit API's pursuit of its own interests with respect to activities which are outside the Tenement Area.  That is so, even if those activities are in connection with iron ore mining by the Joint Venture.

   (11)Clause 10.4, cl 10.9 and cl 10.10 of the Farm‑in Agreement and cl 3.12 of the Joint Venture Agreement are inconsistent with the imposition of any fiduciary duty that could inhibit API's freedom to act in its own interests with respect to the assessment and possible development of transport infrastructure.

   (12)That conclusion is also reinforced or supported by the confined scope of the Joint Venture as outlined in (1) to (5) above.

(c)     The major construction issues

1. From this summary it can be seen that the major construction issues are in the following groups:

   (1)the scope of the Joint Venture and its purposes, see especially cl 3 and cl 15 of the Joint Venture Agreement;

   (2)the proper construction of cl 7(a) of the Farm‑in Agreement and cl 4.2 of the Joint Venture Agreement, each of which Red Hill claims were breached by API;

   (3)the proper construction of cl 10.4, cl 10.9 and cl 10.10 of the Farm‑in Agreement, and cl 3.12 of the Joint Venture Agreement;

   (4)the scope of the powers and discretions vested in the Manager:  what decisions are made by API as funding Participant, and what decisions are made by the Manager (whether API or a successor)?

   (5)the interaction between cl 10.4(b) of the Farm‑in Agreement and cl 7.2 of the Joint Venture Agreement.

2. At least in the fifth respect, I am satisfied that the agreements are ambiguous.  The other four groups of issues may involve what Spigelman CJ described in South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 [35] as a situation where the 'intention of the parties is, for whatever reason, doubtful'.

1. Construction of the instruments:  legal principles

1. Perhaps not unusually, the parties did not join issue about the legal principles respecting the construction of instruments.  Rather, the issues between them related to how the principles applied in this case.

2. The primary duty of the court in construing an instrument is to endeavour to discover the intention of the parties as embodied in the words they have used in the instrument:  Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109 ‑ 110; Permanent Building Society (in liq) v Wheeler (1992) 10 WAR 109, 118 ‑ 119.

3. It is the objectively ascertained intention of the parties, as it is expressed in the instrument, that matters, not the parties' subjective intentions.  The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood the terms to mean:  Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40]; Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 [98].

4. An instrument should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience:  Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530 [82]; Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 [43]. However, as Gleeson CJ, Gummow and Hayne JJ observed in Maggbury [43], what comprises 'business commonsense' in respect of a particular contract, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible.

5. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 350, Mason J set out with evident approval what Lord Wilberforce said in Reardon Smith Line Ltd v Hansen‑Tangen [1976] 1 WLR 989:

   In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating (995 ‑ 996).

6. That passage has been cited with approval in many cases since, including in the High Court.  See, for example, Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 [10]; Pacific Carriers Ltd v BNP Paribas [22].

7. Thus it is clear from these cases, that the objectively ascertained purpose and objective of the transaction may be taken into account in construing the instrument.  See also Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 [8], [53].

8. The apparent purpose or object can be inferred from the express and implied terms of the contract, and from any admissible evidence of surrounding circumstances:  Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd(in liq) [2008] WASCA 80; (2008) 36 WAR 342 [41].

9. There has been, and may remain, some uncertainty about the circumstances in which evidence of surrounding circumstances is admissible in the process of construction of a written contract.

10. It has been said in a number of cases in the High Court that the ascertainment of what a reasonable person would have understood the terms of a contractual document to mean normally requires consideration not only of the text of the document, but also of the surrounding circumstances known to the parties, and of the purpose and object of the transaction:  Pacific Carriers Ltd v BNP Paribas [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [40]; International Air Transport Association v Ansett Australia Holdings Ltd [8], [53].

11. In Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 [3] ‑ [5], Gummow, Heydon and Bell JJ stated that trial judges (and intermediate appellate courts) are bound to apply what was said by Mason J in Codelfa (352) about the admission of surrounding circumstances in construing contracts, unless and until the High Court says otherwise. In Codelfa, Mason J said that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one interpretation.  But it is not admissible to contradict the language of the contract when it has a plain meaning.

12. API submits, and Red Hill accepts, that, read as a whole, the reasons of Mason J in Codelfa say no more than that extrinsic evidence may inform meaning, but cannot contradict meaning when the meaning is clear.  There seems to me to be merit in that submission.

13. The topic of admissibility of extrinsic circumstances has recently been considered by the Court of Appeal in McCourt v Cranston [2012] WASCA 60 [14] ‑ [26]. Pullin JA (with whom Newnes JA agreed) suggested at [22] there was a question arising about how a court should treat what was said by Gummow, Heydon and Bell JJ in Western Export Services v Jireh [5], given that case concerned an application for special leave.  Pullin JA said that he did not need to decide that question.

14. Nevertheless, his Honour stated at [23] that, in view of the pronouncements in Western Export Services v Jireh, when an issue arises about the proper construction of a contract and there is evidence of surrounding circumstances known to the parties or evidence of the purpose or object of the transaction, that evidence will not be admissible unless the court determines that the contract is ambiguous or susceptible of more than one meaning.  I propose to adopt that approach.

15. It should be noticed that a broad concept of ambiguity may apply in this context.  See, for example South Sydney Council v Royal Botanic Gardens [35]; Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd [1999] WASC 218; (1999) 21 WAR 425 [43] ‑ [45]; Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Case 60‑853, 75, 343.  Moreover, as Pullin JA pointed out in McCourt v Cranston [23], it is enough if the instrument is 'susceptible of more than one meaning'. See in this regard Spigelman JJ, 'From text to context: Contemporary contractual interpretation' (2007) 81 Australian Law Journal 322 ‑ 337.

16. In this case, as I have said, I consider that the language of the Farm‑in Agreement and the Joint Venture Agreement, when read together as they must be, is ambiguous or susceptible of more than one meaning, at least as regards the relationship between cl 10.4 of the Farm‑in Agreement and cl 7.2 of the Joint Venture Agreement.

17. It is, in my view, important to bear in mind the significant limits on the work that can be done by background facts in the process of construction of an instrument.  It remains the instrument that is to be construed.  The search is for the meaning of what the parties said in the instrument, not what the parties meant to say:  Australian Broadcasting Commission v Australasian Performing Right Association Ltd (109 ‑ 110); Byrnes v Kendle [53], [98] ‑ [99]. The reference to context is not a licence to ignore the text, or to rewrite the contract to include provisions reflecting what the court infers from the background facts to have been intended by the parties: Euphoric Pty Ltd v Ryledar Pty Ltd [2006] NSWSC 2 [31] ‑ [33], approved on appeal Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [108] ‑ [109]. See also Vincent Nominees Pty Ltd v Western Australian Planning Commission [2012] WASC 28 [43]. As is said in Lewison & Hughes, The Interpretation of Contracts in Australia (2012) [3.14.5] 'reliance on background must be tempered by loyalty to the contractual text'.

18. Further, there are important limits on the kind of evidence which may be admissible, and the purposes for which it is admissible.  These principles are relevant to the determination of numerous objections made by API to evidence, sought to be adduced by Red Hill, of communications prior to the execution of the Farm‑in Agreement.

19. Evidence of prior negotiations is, in the context of construction of an instrument, admissible for some purposes, but not for others.  The position was explained by Mason J in Codelfa (352), in a passage applied by McLure JA (with whom Wheeler JA agreed) in Chemeq Ltd v Shepherd Investments International Ltd [2007] WASCA 117 [155] ‑ [156]. Insofar as such evidence establishes objective background facts known to the parties, or the genesis, purpose or object of the transaction, it is admissible. Insofar as the evidence consists of statements and actions of the parties reflective of their actual intentions and expectations, such evidence is inadmissible. Such statements reveal the terms of the contracts which the parties intended or hoped to make. They are superseded by, or merged in, the contract.

20. In Byrnes v Kendle, Heydon and Crennan JJ explained that the rationale for this approach is found in the objective theory of contract:

    Contractual construction depends on finding the meaning of the language of the contract - the intention which the parties expressed, not the subjective intentions which they may have had, but did not express.  A contract means what a reasonable person having all the background knowledge of the 'surrounding circumstances' available to the parties would have understood them to be using the language in the contract to mean.  But evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of 'surrounding circumstances'.  And in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd this Court said:

    'It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe.'

    One reason why the examination of surrounding circumstances in order to decide what the words mean does not permit examination of pre‑contractual negotiations is that the latter material is often appealed to purely to show what the words were intended to mean, which is impermissible.  The rejected argument in Chartbrook v Persimmon Homes Ltd was that all pre‑contractual negotiations should be examined, not just those pointing to surrounding circumstances in the mutual contemplation of the parties. The argument purported to accept that contractual construction was an objective process, and that evidence of what one party intended should not be admissible. But other parts of the argument undercut that approach.  Mr Christopher Nugee QC submitted: 'The question is not what the words meant but what these parties meant … Letting in the negotiations gives the court the best chance of ascertaining what the parties meant'.  It would have been revolutionary to have accepted that argument [98] ‑ [99].  (original emphasis, footnotes omitted)

21. The distinction was succinctly expressed by Pullin JA in McCourt v Cranston [24]. His Honour stated that evidence of subjective opinions are not admissible, nor is evidence of negotiations; the surrounding circumstances have to be objective facts and they have to be known to both parties. Objective evidence of the aim or object of the transaction is also admissible: [26]. His Honour applied that approach in excluding the extrinsic evidence which had been relied upon in that appeal: see [27] ‑ [32]. For example, the fact that the seller 'required' a cash offer was inadmissible because it is just a 'desire about what was to be in the contract' [28].

22. Red Hill relies on the statement in Lewison & Hughes that in Royal Botanic Gardens and Domain Trust [26] ‑ [30], the High Court had regard to the various drafts of a deed that passed between the parties in order to construe the concluded deed of lease. In my respectful view, the matters to which the court had regard in Royal Botanic Gardens and Domain Trust [26] ‑ [30] are not properly characterised as mere drafts.  The instrument to be construed was a deed of lease entered into in 1976, and expressed to take effect from 1958.  The negotiations prior to the execution of the instrument in 1976 had resulted in an agreement under which rent was paid at £1,000 per annum.  That agreement was, as the court observed in Royal Botanic Gardens and Domain Trust [27], within the second category in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353, 360. The court had regard to that agreement in construing the deed of lease.

23. As mentioned earlier in section 2, both the Farm‑in Agreement and Joint Venture Agreement make extensive use of defined terms.  Definitions do not have substantive effect.  They are not to be construed in isolation from the operative provision(s) in which a defined term is used.  Rather, the operative provision is to be read by inserting the definition into the provision:  Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216 [84], [103]; Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue [2011] WASCA 228 [62], [150], [218]. Those cases dealt with statutory interpretation; the same principle applies in interpreting contracts: Vincent Nominees Pty Ltd v Western Australian Planning Commission [25].

1. Construction of the instruments:  background facts; findings and rulings

1. Both Red Hill and API relied on background facts known to both parties in support of their respective constructions of the instruments.

(a)     Common ground

1. In its written outline of opening submissions, Red Hill correctly submits that it is common ground that the following matters were known to both parties at the time the instruments were entered:

   (a)the commercial exploitation of iron ore from the Tenements would only be possible if iron ore mined from the Tenements could be transported to the port and loaded onto ships;

   (b)neither API nor Red Hill had any rights of access to transport infrastructure by which any iron ore mined from the Tenements could be transported to port and loaded onto ships;

   (c)whether or not the proposed project would be commercially viable was highly dependent upon not only exploration success, but also on the issue of transportation and the costs of any necessary transport infrastructure.

2. It is also common ground that the following further facts were known to both parties:

   (a)the Tenements were around 100 km from the coastline, and the capital cost of transport infrastructure was likely to be far greater than the capital cost of extracting iron ore from the Tenements (defence pars 4, 5(i); reply pars 2, 7);

   (b)the extent of iron ore deposits in the Tenements was not known (reply par 6; API's closing written submissions par 4).

1. API objects on the grounds of relevance to exhibit D1 [92], [96], [99], [100], [109], [110], which relate to communications between API and Red Hill in August 2012 and thereafter.  It is not necessary to rule on this objection.  If admitted, the evidence is not probative of any issue and does not influence my reasoning in any respect.

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CIVIL

CITATION: RED HILL IRON LTD -v- API MANAGEMENT PTY LTD [2012] WASC 323 (S)

CORAM:   BEECH J

HEARD:   ON THE PAPERS

DELIVERED          :   5 NOVEMBER 2012

FILE NO/S:   CIV 2508 of 2011

BETWEEN:   RED HILL IRON LTD

Plaintiff

AND

API MANAGEMENT PTY LTD
Defendant

Catchwords:

Practice and procedure - Costs - Application to remove limits on items in the scale of costs - Whether costs of private mediation are incidental to the proceedings and can be the subject of a costs order

Legislation:

Legal Profession Act 2008 (WA), s 280
Supreme Court Act 1935 (WA), s 37

Result:

Limits on scale items removed
Costs orders made

Category:    B

Representation:

Counsel:

Plaintiff:     No appearance

Defendant:     No appearance

Solicitors:

Plaintiff:     Tottle Partners

Defendant:     DLA Piper Australia

Case(s) referred to in judgment(s):

Cazaly Iron Pty Ltd v Minister for Resources [No 5] [2008] WASCA 181

Charlick Trading Pty Ltd v Australian National Railways Commission [2001] FCA 629

Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2011] WASC 268 (S2)

Flotilla Nominees Pty Ltd v Western Australian Land Authority [2003] WASC 122 (S); (2003) 28 WAR 95

Heartlink Ltd v Jones [2007] WASC 254 (S)

O'Rourke v P & B Corporation Pty Ltd [2008] WASC 36 (S)

Pourzand v Telstra Corporation Ltd [2012] WASC 210 (S2)

Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323

Suffolk v Suffolk [2010] FamCA 170

Tranchita v Danehill Nominees Pty Ltd [No 3] [2009] WASC 49

BEECH J: 

Introduction

1. On 12 September 2012, I delivered my reasons for judgment after the trial of this action:  Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323.  I ordered that the proceedings be dismissed, and that Red Hill pay API's costs of the proceedings, including reserved costs, to be taxed if not agreed.  I also made an order providing that any application for special orders in relation to costs be made by 26 September 2012, supported by affidavit and submissions.  By consent, the date for any such application was extended.

2. API has made an application for special costs orders.  It seeks an order that the limits provided by the scale (the Scale) in the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2010 be removed in respect of preparing the defence, requesting and giving particulars, giving discovery, getting up for trial, and counsels' fees.  It also seeks an order in relation to the costs of a private mediation, and an order that there be an allowance for the attendance of both a senior practitioner and a junior practitioner at the trial.

Special costs orders - principles

1. Section 280(2) of the Legal Profession Act 2008 (WA) provides:

   [I]f a court or judicial officer is of the opinion that the amount of costs allowable in respect of a matter under a costs determination is inadequate because of the unusual difficulty, complexity or importance of the matter, the court or officer may do all or any of the following -

   (a)order the payment of costs above those fixed by the determination;

   (b)fix higher limits of costs than those fixed in the determination;

   (c)remove limits on costs fixed in the determination;

   (d)make any order or give any direction for the purposes of enabling costs above those in the determination to be ordered or assessed.

2. There was no dispute about the relevant legal principles. 

3. The principles have recently been summarised by Edelman J in Pourzand v Telstra Corporation Ltd [2012] WASC 210 (S2) [9] ‑ [14]:

   [B]efore a discretion can be exercised to make a special costs order, the court must be of the opinion:

   (1)the Scale item is inadequate, and

   (2)the inadequacy arises because of the unusual difficulty, or complexity, or importance of the matter:  Heartlink Ltd v Jones As Liquidator of HL Diagnostics Pty Ltd (in liq) [2007] WASC 254 (S) [11] (Martin CJ).

   These questions are to be addressed as matters of impression rather than detailed evaluation:  EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2008] WASC 275 (S) [7] (Martin CJ). Courts should draw from their experience and act on impressions gained during the litigation to take into account the issues which have been involved, albeit without attempting to make an estimate of the time which is thought to be appropriate when the information for that assessment is not all available: Flotilla Nominees Pty Ltd v Western Australian Land Authority [2003] WASC 122 (S) [43] (Pullin J).

   As to (1) (inadequacy of the Scale item), the inadequacy will be demonstrated if there is a fairly arguable case that the bill to be presented to the taxing officer may tax at an amount which is greater than the limit that would be imposed by the relevant costs determination:  Heartlink Ltd [16] (Martin CJ).

   A conclusion that it is fairly arguable that the taxing officer might properly allow costs at an amount greater than the amount allowable under the Scale does not always require evidence of the costs actually incurred:  Frigger v Lean [2012] WASCA 66 [81] (Allanson J; Newnes & Murphy JJA agreeing).

   As to (2) (inadequacy arising due to the unusual difficulty, complexity, or importance of the matter), the adjective 'unusual' qualifies only the 'difficulty' of the matter, not its complexity or importance: see, in relation to the identical terms of the predecessor to s 280(2): Heartlink Ltd [17] (Martin CJ); Hodgkinson v Doepel & Associates Architects Pty Ltd [2006] WASC 237 (S) [33] (Simmonds J); SDS Corporation Ltd v Pasdonnay Pty Ltd [2004] WASC 26 (S2) [102] ‑ [106] (Roberts‑Smith J).

   Finally, although replacing the amount of the Scale item with a different ceiling may be appropriate where sufficient information exists to make that assessment, it is not uncommon for an order to be made removing the limit for the Scale item without replacing that limit with a different ceiling:  EDWF Holdings [8] ‑ [9], [13] (Martin CJ). When the Scale ceiling is lifted a taxing officer is otherwise unconstrained and need not allow costs above the previous Scale ceiling.

4. Further, one of the policy considerations that should guide a court in addressing an issue under s 280(2) is that the court should not usurp the role of the taxing officer: Heartlink Ltd v Jones [2007] WASC 254 (S) [13]; O'Rourke v P & B Corporation Pty Ltd [2008] WASC 36 (S) [20].

5. 'Importance' in s 280(2) encompasses importance to the parties; it does not require broader importance to the public or a sector of the public: Heartlink v Jones [17] ‑ [19].

6. 'Unusual' in s 280(2) means unusual having regard to what one might describe as the usual run of civil cases determined in the Supreme and District Courts. That involves a value judgment by the court taking into account the court's experience of a particular case compared to the usual run of cases: O'Rourke v P & B Corporation Pty Ltd [23] ‑ [25].

7. It is convenient to begin consideration of the application of these principles to this case with the question of whether the case was one of 'unusual difficulty, complexity or importance'.

Was the case complex, important, or unusually difficult?

1. API submits, and Red Hill accepts, that this action was complex, important for both parties, and more than usually difficult (API's submissions [12]; Red Hill's submissions [3]).  I am satisfied that that is so.  The subject‑matter of the action was, broadly speaking, whether the assessment and development of rail and port facilities were joint venture activities under the Joint Venture Agreement between Red Hill and API and whether API had any fiduciary duties in these spheres.  The evidence before the court demonstrated that the potential project for the assessment and development of that transport infrastructure was in the scale of several billion dollars.  Moreover, Red Hill alleged that API had breached its contractual and fiduciary duties as a joint venturer.  The evidence at trial established that API was the manager of a number of other joint ventures in the Pilbara region.  The defence of those allegations would doubtless have been of substantial importance to API.

2. Further, relative to the usual run of cases, the action gave rise to complex issues requiring close attention to the instruments governing the parties' relationship, and their dealings.

3. I am satisfied that these features and character of the action gave rise to the inadequacy of the Scale items referred to below.

4. I turn to the items of the Scale in respect of which API seeks a lifting of the limit.  For the reasons that follow, I would remove the limit in each case.

Defence

1. The Scale limit (item 3) is 10 hours of work by a senior practitioner, with an allowance of $4,290.

2. Considerable detail is provided on the time spent in the preparation of the various iterations of the defence by the team of lawyers on behalf of API:  see the affidavit of Ms Mackay [12] ‑ [30].  The initial defence alone involved considerably more work than the Scale contemplates.  There is a fairly arguable case that this item on the bill of costs may tax at an amount greater than the Scale amount.

3. Red Hill does not oppose the lifting of the limit.  However, it submits that API took 'an extravagant approach' by which no expense was spared in the conduct of the litigation.  In my view, that is a matter that falls to be determined in the course of the process of taxation.  It will be for the taxing officer to determine the reasonableness of the work done in relation to the defence, and the amended defences. 

4. For the benefit of the taxing officer, I would observe that, from the court's perspective, the detail pleaded in the defence, and the subsequent amended defences, elucidated API's case on the proper construction of the instruments, and the parties' dealing, in a way that was conducive to the efficient and just resolution of the action.

5. I would remove the limit for item 3.

Requesting and giving particulars

1. The Scale provides a limit of three hours for a junior practitioner for requests for particulars, and five hours for the giving of particulars (item 6).

2. I am satisfied by the evidence of Ms Mackay ([31] ‑ [43]) that there is a fairly arguable case that the bill to be presented to the taxing officer may tax at an amount which is greater than the limit that would be imposed by the Scale.  Consequently, I would remove the Scale limit for these items. 

Discovery

1. The Scale limit (item 7) is 10 hours by a senior practitioner, an amount of $4,290.

2. The evidence of Ms Mackay establishes that the time spent on discovery was almost 1,000 hours.

3. Red Hill does not oppose the lifting of the limit for discovery.  However, Red Hill submits that the court should fix a limit, although none is suggested.  I decline to do so.  In my view, the court is not well placed to fix a limit.  The assessment of what was reasonable is a matter for the taxing officer.

Getting up case for trial

1. The Scale limit (item 17) is 120 hours by a senior practitioner, an amount of $51,480. 

2. The evidence of Ms Mackay is that the time spent by counsel and instructing solicitors in getting the case up for trial was about 15 times that figure.

3. Red Hill accepts that the limit should be lifted, but suggests that the limit should be fixed at six times the scale.  There is no explanation as to the derivation of that figure.

4. As in relation to discovery, I am not persuaded that it is appropriate to fix a limit.  Rather, I consider that the limit should be removed, and the question of what are the reasonable costs of getting up be determined by the taxing officer.

Counsels' fees on trial

1. The Scale limit (item 20) is 3.5 days preparation, plus the first day of the trial.  The maximum allowable daily rates for subsequent days under the Scale are $6,050 per day for senior counsel, and $3,410 per day for junior counsel.

2. The evidence of Ms Mackay is that both senior and junior counsel for API spent over three weeks (working on the basis of a five‑day week) in preparation for trial.  Senior counsel's rates are more than double the Scale.  Junior counsel charged at the Scale rate for senior counsel.

3. It is clear that the court does not lift the limit on hourly rates merely because a party's solicitor or counsel has charged at a rate higher than the Scale:  Flotilla Nominees Pty Ltd v Western Australian Land Authority [2003] WASC 122 (S); (2003) 28 WAR 95 [22]; Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2011] WASC 268 (S2) [7].

4. In my view, the complexity and importance of this action made it reasonable and proper for API to engage senior counsel and counsel at rates above those allowed in the Scale.  There is a fairly arguable case that item 20 on the bill may tax at an amount greater than the limit in item 20.  The limit should be lifted.

5. An order lifting the limit on item 20 does not constrain or affect the discretion of the taxing officer to allow only for rates, hours and amounts which are, in all the circumstances of the case, reasonable:  Cazaly Iron Pty Ltd v Minister for Resources [No 5] [2008] WASCA 181 [10].

6. In this regard, like Le Miere J in Verve [12] ‑ [13], I consider it appropriate to leave the determination of the appropriate hourly rate to the taxing officer, rather than attempt to fix a maximum rate myself.

Two solicitors at trial

1. Under item 20(f) of the Scale, provision is made for a clerk or paralegal to attend a trial, in addition to an instructing senior practitioner, at a maximum hourly rate of $209.  API seeks an allowance for a junior practitioner.  The maximum hourly rate for a junior practitioner is $297.

2. Based on my observations as trial judge, and as case manager, I am satisfied that it was appropriate and reasonable, in a party‑party sense, for API to have both a senior practitioner and a junior practitioner present at the trial to assist and instruct counsel.

Costs of private mediation

1. Although there are some old authorities taking a different view, it is clear that in Western Australia the costs of a court ordered mediation are part of the costs of an action and can be the subject of a party‑party costs order.  See, for example, item 24(a) of the Scale.

2. In Tranchita v Danehill Nominees Pty Ltd [No 3] [2009] WASC 49, Martin CJ made these observations about the costs of mediation in the context of considering whether there should be an allowance for the attendance of counsel at a mediation:

   Mediation is a most desirable process that has now become a primary focus of the activity of the court. The success of mediations conducted by officers of the court has substantially reduced the proportion of cases going to trial. That success is likely to be enhanced if parties are encouraged to bring all necessary legal advisers, including their counsel, to a mediation to give them advice at that mediation, with a view to achieving resolution of the action [6].

3. The policy reasons for treating mediation and settlement negotiations as an element of party‑party costs were explained by Mansfield J in Charlick Trading Pty Ltd v Australian National Railways Commission [2001] FCA 629 [92] ‑ [93].

4. In this case, the parties elected to conduct a private mediation, not a mediation through the court. API submits that the Chief Justice's observations apply with equal force to private mediations. By contrast, Red Hill submits that the court does not have jurisdiction to award costs in relation to mediations that are conducted by someone who is not an officer of the court. Further, Red Hill submits that the court's jurisdiction to make costs orders is restricted to costs that are 'of and incidental to all proceedings in the [court]': s 37 of the Supreme Court Act 1935 (WA), and that a private mediation is not of that character.

5. I do not accept these submissions of Red Hill.  The question can be approached by considering the recoverability of costs of an informal settlement conference between the solicitors and parties, without any mediator.  To my mind, such costs are plainly incidental to the proceedings.  Further, they are specifically encompassed by item 24(b) of the Scale.

6. In my view, the same position applies to a settlement conference conducted by way of a private mediation. In my opinion, a private mediation of an action before the court can properly be described as 'incidental' to the proceedings before the court. Further, the policy considerations favouring the encouragement of attempts to settle the case seem to me to support this construction of s 37 of the Supreme Court Act, and item 24 of the Scale.

7. Although the statutory framework is not identical, I note that in Suffolk v Suffolk [2010] FamCA 170, O'Reilly J held that the costs of a private mediation were part of the costs of the proceedings.

8. In this case, by a written mediation agreement, the parties agreed to bear the mediators costs as mediator in equal properties.  Subsequently, the parties also agreed to jointly appoint a pricing expert, with each party bearing half the cost.  As a matter of discretion I would not order Red Hill to pay API's costs of paying the mediator's fees, or the costs of the expert.  I see no justification for departing from the agreement between the parties on that topic.  I do not construe their agreement to share the costs equally as intended to be subject to a costs order after trial (in the event the mediation failed to resolve the action).

9. I have considered the terms of the written mediation agreement between the parties.  If I considered that it revealed an intention that each party should bear its own costs in relation to the mediation, I would have declined to make a costs order respecting the mediation.  However, I do not think the mediation agreement reveals any intention as to the costs of the mediation generally.  Rather, it is concerned only with the immediate question of the payment of the mediator's fees.

10. In the circumstances of this case I think the parties' costs of mediation should be an element of party‑party costs and thus awarded to API.

11. For those reasons, apart from the mediator's and the expert's costs, I would make the orders sought by API in relation to its costs of the mediation.

12. The several elements of reasonableness in the allowance for costs will require the assessment of the taxing officer.

Costs of this application

1. API has, in substance, succeeded on the matters in dispute on this application.  Consequently Red Hill should pay the costs of this application.

Orders

1. For the reason given, I make the following orders:

   1.The limits provided by the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2010 be removed in respect of the following items:

   1.1Item 3(b) - Defence

   1.2Item 6(a) - Requesting particulars

   1.3Item 6(b) - Giving particulars of a pleading

   1.4Item 7(b) - Giving discovery of documents

   1.5Item 17 - Getting up a case for trial

   1.6Item 20(a), (b), (c) and (d) - Counsel's fees

   2.There be allowance for the private mediation conference between the parties held in June 2010 as an informal conference that was reasonably held, and reasonable amounts be allowed for:

   2.1the preparation reasonably undertaken for the mediation conference;

   2.2conferences between counsel and own instructing legal practitioner where reasonably necessary;

   2.3the attendance by counsel and instructing legal practitioner at the mediation conference, including for travel and accommodation; and

   2.4all disbursements reasonably incurred in relation to the mediation conference, but not including the costs of the mediator and experts.

   3.There be allowance for the attendance of both a senior practitioner and a junior practitioner at the trial.

   4.The plaintiff pay the costs of this application to be taxed if not agreed.