Roehampton Developments Pty Ltd (in Liq) v FAI General Insurance Company Limited
[2000] WASC 235
•26 SEPTEMBER 2000
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
CITATION: ROEHAMPTON DEVELOPMENTS PTY LTD (IN LIQ) -v- FAI GENERAL INSURANCE COMPANY LIMITED [2000] WASC 235
CORAM: HASLUCK J
HEARD: 26-31 JULY 2000
DELIVERED : 26 SEPTEMBER 2000
FILE NO/S: CIV 1886 of 1997
BETWEEN: ROEHAMPTON DEVELOPMENTS PTY LTD (IN LIQ) (ACN 058 507 485)
Plaintiff
AND
FAI GENERAL INSURANCE COMPANY LIMITED (ACN 000 327 855)
Defendant
Catchwords:
Performance bond linked to a mining agreement - Security for minimum return of net income by prescribed date - Whether payment under bond to be made on demand or on proof of event of default - Meaning of word "ore" - Whether bond should be characterised as guarantee - Whether material alteration sufficient to discharge liability under guarantee
Legislation:
Supreme Court Act 1935, s 32
Result:
Plaintiff's claim for $800,000 plus interest allowed
Representation:
Counsel:
Plaintiff: Mr R J Ainslie
Defendant: Mr G A Rabe
Solicitors:
Plaintiff: Mallesons Stephen Jaques
Defendant: Minter Ellison
Case(s) referred to in judgment(s):
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549
Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Cohns Industries Pty Ltd v Deputy Federal Commissioner of Taxation (1979) 24 ALR 658
Dilworth & Ors v The Commissioner of Stamps [1899] AC 99
Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 Lloyds Rep 166; [1978] 1 QB 159
Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyds Rep 546
Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812
Howe Richardson Scale Co Ltd v Polimex‑Cekop & National Westminster Bank Ltd [1978] 1 Lloyds Rep 161
I E Contractors Ltd v Lloyds Bank (1990) 51 BLR 1
L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235
Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales [1982] 1 AustConst LR 81
Posgold (Big Bell) Pty Ltd & Ors v Placer (Western Australia) Pty Ltd & Ors [1999] WASCA 217
Reed Construction Services Pty Ltd v Kheng Seng (Aus) Pty Ltd (1999) 15 BCL 158
Savoy Hotel Company v London County Council [1900] 1 QB 665
Sherritt Gordon Mines Ltd v Federal Commissioner of Taxation (1976) 10 ALR 441
Siporex Trade SA v Banque Indosuez [1986] 2 Lloyds Rep 146
The Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429
Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd [1996] AC 199
Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443
YZ Finance Co Pty Ltd v Cummings [1964] ALR 667
Case(s) also cited:
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Carr v Guardian Assurance Co Ltd & Ors [1928] NZLR 108
Jones v Dunkel & Anor (1959) 101 CLR 298
HASLUCK J: The plaintiff in these proceedings claims the sum of $800,000 pursuant to a Performance Bond entered into between the parties on 6 November 1996. The plaintiff says that the Performance Bond was brought into existence in order to secure performance of certain work to be performed by a contractor, Taylor Barnes Pty Ltd, in connection with the mining of ore at the Gordon Sirdar Mine and its treatment at the Roehampton treatment plant. The plaintiff contends that the defendant is in breach of its obligations under the Bond in that it has failed or refused to meet a demand for payment dated 4 August 1997.
The defendant denies liability on various grounds and asserts, in particular, that the defendant was not obliged to meet the plaintiff's demand because the event of default specified in the Bond had not occurred at the time the demand was made. This plea makes it necessary for me to begin by looking at the nature of the mining operation being conducted at the Gordon Sirdar Mine and the facts and matters leading up to the making of the mining agreement and the negotiation of the related Performance Bond.
The Gordon Sirdar Mine
It is apparent from a report dated 20 July 1994 prepared by Snowden Associates Pty Ltd Mining Industry Consultants that the Gordon Sirdar Gold Mine is located approximately 35 kilometres north north‑east of Kalgoorlie. The Snowden report was directed to a proposal whereby Roehampton Developments Pty Ltd ("Roehampton") would commence open‑cut mining of the Gordon Sirdar gold deposit during 1994 with the ore being trucked 45 kilometres to the Fimtails treatment plant near Kalgoorlie. The Snowden report contains details of the proposed pit design, a description of the mining method, an analysis of assay data and an estimation of the ore reserves, including reference to the grade of gold distribution at Gordon Sirdar.
It seems that Roehampton engaged Exploration Mining Consultants Pty Ltd ("EMC") as mine managers. EMC prepared a new resource and reserve estimate and prepared various monthly reports as the work proceeded. Taylor Contracting Pty Ltd performed earthmoving work and eventually became a sizeable creditor of the mining company. Eventually, however, on 13 May 1996, the directors of Roehampton Developments and its parent company, Roehampton Resources NL, were obliged to appoint Michael Ryan and Antony Woodings of the firm Taylor Woodings, chartered accountants, to be joint and several administrators of the two companies.
It is apparent from a valuation report prepared by Mr P G Onley of Mining & Resource Technology Pty Ltd ("MRT") that soon after their appointment the administrators requested MRT to undertake an evaluation of the project and to prepare a report for inclusion in an information memorandum to be provided to major creditors of the two companies. Mr Onley had a background of 25 years' experience in mineral exploration in Australia and New Guinea. It is apparent from his report that he was able to obtain access to the company records including the previous assessments undertaken by Snowden and by EMC. His report recognises that in order to carry out a successful mining operation it is necessary to exercise grade control and to determine what is the economic cut‑off grade. He noted at 9 of his report that EMC estimated the reserve to be 273,380 tonnes at 3.33 grams of gold per tonne containing 29,273 ounces of gold at a cut off of 1.5 grams of gold per tonne.
In estimating the size of the remaining reserves, Mr Onley had this to say at par 4.8.1 of his report:
"The company records indicate that, from the start of the present operation in mid‑1995 to the mine closure in March 1996, mine production was 101 653 t at 2.08 g/t Au. The Snowden model predicted 99 974 t at 2.24 g/t Au and the EMC model predicted 103 380 t at 2.63 g/t Au, assuming 20% dilution at 0.15 g/t Au, to that point in the mining schedule.
Thus, the Snowden reserve indicates that the minable ore remaining within the pit designs is 436 120 t at 2.82 g/t Au (39 545 ounces), while the EMC model indicates 172 141 t at 3.72 g/t Au remain within the pit (20 590 ounces).
The Snowden model was not available for review, but a review of the EMC model by MRT supports an Indicated Resource of 135 500 t at 4.1 g/t Au remaining within the pit (17 863 ounces gold) using a 20 g/t Au upper cut or 135 500 t at 5.19 g/t Au (22 612 ounces gold) using a 40 g/t Au upper cut. Assuming dilution of 20% at 0.15 g/t Au and mining recovery of 95%, this approximates to a Probable Reserve of 154 500 t at 3.44 g/t Au containing 17 086 ounces of gold at a 20 g/t Au upper cut and 154 500 t at 4.35 g/t Au containing 22 743 ounces of gold using a 40 g/t Au upper cut.
It is stressed that MRT only reviewed an existing model prepared by EMC and did not prepare an independent estimate of Resources and Reserves. MRT has not reviewed the Snowden model."
Mr Onley went on to say that the difference between resource estimates prepared by Snowden and EMC and the poor reconciliation between production and reserve estimates indicated that mineral resources and ore resources represented an area of risk. Intending purchasers would be obliged to make their own estimates of mineral resources and ore reserves.
In the context of the present dispute, the key points to note are that at the time the subject mining agreement and Performance Bond were entered into, and the new mining operation was commenced, the parties to the present dispute had access to three expert assessments of the mine's characteristics and potential. Mine production before the closure was at a grade of 2.8 grams of gold per tonne. There was a degree of uncertainty as to the size of the remaining reserves and as to the available grade, with figures being mentioned as to grade within the range 3.44 g/t to 4.35 g/t.
On 20 September 1996 Mr Ryan and Mr Woodings were appointed as the liquidators of Roehampton. A month later, Mr Ryan received a telephone call from Rob Taylor of Taylor Contracting in which Taylor canvassed the possibility of the Gordon Sirdar being mined on a contract basis by a company called Taylor Barnes Pty Ltd. Mr Taylor followed up the conversation with a letter dated 18 October 1996 to Taylor Woodings containing an outline of his proposal. The letter is in these terms (omitting the inessential parts):
"Further to our telephone conversation regarding the above, we would like to propose the following:
1.That Taylor Barnes would be prepared to carry out on a month by month basis, the mining, drill and blast and road haulage of gold ore ex Gordon Sirdar minesite to the Roehampton treatment plant as well as supplying crushing facilities. We have indications from Henley Brook Investments that they would fund the treatment plant operation on a month by month basis.
2.According to all parties it is believed that this should generate an estimated $1.3M revenue at the end of each mining period (based on treating 22,000 tonne at 3.9 grams per tonne). With this revenue it would be proposed to pay the Contractors for carrying out the works at the end of each month with the surplus going towards the secured and unsecured creditors.
…
Once the Contractors have been paid if [sic] would leave a surplus of an estimated $512,500 per month.
3.It is estimated that there is at least 180,000 tonne of gold ore with approximately 4,000 tonne already on the ore paid [sic], assuming that it was mined at 22,000 tonne per month it would take nine (9) months to complete.
Surplus of $512,500 x 9 months = $4,612,500
4.Remembering that these numbers are based on 3.9 gram per tonne (EMC indicate that their [sic] is an average grade of 4.2 grams per tonne) it is also our belief that there is more than 180,000 tonne of ore available.
As you can see this proposal would allow the secured and unsecured creditor an opportunity to be paid over a nine (9) month period, as well as have shareholders of Roehampton with assets at the completion of this operation."
Mr Ryan expressed interest in responsive letters dated 24 and 31 October 1996, but made it clear that the secured creditor would require a bank guarantee in an amount equivalent to the highest offer otherwise available so that the creditors would not be disadvantaged. He invited Mr Taylor to submit a formal proposal.
Mr Taylor's formal proposal was enclosed with a letter dated 31 October 1996. The proposal contained a calculation of mining and revenue. The remaining ore reserves were estimated to be 200,000 tonnes. The average grams per tonne were estimated to be 4.25. By calculation based on the previous mill operation, it was expected that mill recovery would average 3.9 grams per tonne (approximately 90 per cent recovery). The estimation of costs per four week period was $782,900 on the assumption that the contractor would mine and mill a minimum of 20,000 tonnes within that period.
The contractor agreed to provide a bond in the form of an "irrevocable guarantee" by an approved bank payable on first demand but subject to certain conditions. These conditions were subsequently reflected in the mining agreement and will be looked at later. I note in passing that the conditions allowed for proportional payment. Thus, "if the payment to the liquidator does not reach the said $800,000 within the stated time period of nine (9) months but the liquidator has received a lesser amount then the payment of the guarantee will be in direct proportion to the amount paid".
Various exchanges took place between the interested parties in the following weeks. Mr Ryan said in evidence that he made it clear to the interested parties throughout the negotiations that as far as he was concerned he was selling an asset in liquidation. Having regard to the troubled history of the mine, he would not be providing any warranties or representations except as to title. Nonetheless, he was interested in the Taylor proposal, as it represented one way of turning the company's assets to account for the benefit of the creditors if the mine could not be sold as a going concern in the manner envisaged by the Onley/MTC report.
Taylor did not give evidence at the hearing before me. According to Mr Ryan's version of what was said, which was received without objection, Taylor held the view that he and his partner, Barnes, could conduct a mining operation at the site more efficiently than the previous operators. There was also some negotiation concerning the transfer of the treatment plant to Taylor Barnes after the proposed mining had finished. Mr Ryan made it clear throughout the negotiations that any mining agreement entered into between the parties in order to carry into effect the Taylor proposal would have to be secured by a performance bond. Mr Ryan received an initial payment of $100,000 from Taylor Barnes in support of their application on the basis that this would be returned when arrangements between the parties were finalised.
On 19 November 1996, a mining agreement was entered into by the plaintiff and Taylor Barnes. The agreement contains recitals in these terms:
"A.The Company is the holder of various mining tenements situated in the North East Coolgardie Mineral Field upon which it operates a gold mine know [sic] as the Gordon Sirdar Mine and a treatment plant known as the Roehampton Treatment Plant.
B.The Contractor and the Company have agreed that the Contractor shall perform certain work in connection with the mining of ore at the Gordon Sirdar Mine and its treatment at the Treatment Plant.
C.The Company has agreed to grant to the Contractor the sole and exclusive option exercisable at any time during the Option Period to purchase the Company's interest in the Treatment Plant and the Treatment Plant Tenements on and subject to the terms and conditions of this agreement."
By cl 2 of the agreement, the services the subject of the agreement were to commence on 1 December 1996 and be completed within 12 months or any other date agreed between the parties in writing. This meant that the contractor was to provide "at the mine expertise and all necessary labour and equipment required to produce ore for treatment at the treatment plant at a rate at least equal to 20,000 dry tonnes in each mining period." The definition of "ore" is in these terms:
" 'Ore' shall include all earth, rock or other materials of a like nature within the area of the Mine which contain gold or any other mineral in such quantities as to make its extraction profitable in the reasonable view of the Company."
Clause 4 of the mining agreement deals with payment. The plaintiff was to pay the contractor for all services actually performed in accordance with the contracts payment schedule "which constitutes the contractor's sole basis for remuneration." Importantly, by cl 4.2, "amounts payable to the contractor under the contract shall be payable only from the amounts received by the company for bullion produced from the mine."
The contract payments schedule is set out in Sch 2 of the mining agreement in these terms (omitting inessential parts):
"1Initial Repairs
An initial sum of up to $100,000 will be paid for the cost of repairs and cleaning to the Treatment Plant.
2Mine Production - 20,000 tonne base
2.1In respect of each Mining Period, payment for each 20,000 dry tonnes of Ore produced will be $782,900 and will be paid within 7 days of receiving an invoice for the same:
2.2This base payment will be reduced in the following manner:
(a)on account of the Contractor's use of the Treatment Plant up until the Option is exercised that payment will be reduced by $9,231 for each Mining Period;
(b)on account of monies due to Bank of Western Australia Ltd ('BankWest') by the Contractor that payment will be reduced as follows:
At the end of the first
Mining Period $10,000At the end of the second
Mining Period $10,000At the end of the third
Mining Period $64,500
The Company agrees to forward these amounts to BankWest on behalf of the Contractor and a receipt from BankWest will discharge the Company from its liability to pay these amounts to the Contractor.
3.Additional Production/Shortfall in Production
An additional $35.58 per tonne will be paid in respect of any additional Ore produced over 20,000 dry tonnes in each Mining Period. If the amount of Ore produced in a Mining Period is less than 20,000 dry tonnes, the amount payable under paragraph 2.1 will be proportionately reduced by this amount per tonne.
4.Cost of Rehabilitation
The first $300,000 due to the Contractor shall be withheld as security against rehabilitation costs and which shall be repaid to the Contractor either when title to the Treatment Plant Tenements and Treatment Plant is transferred pursuant to exercise of the Option or when the Site is rehabilitated in accordance with clause 11.4 in which case the parties agree that receipt by the Contractor of the gold and silver in circuit at the Treatment Plant will be accepted as full payment of the $300,000.
5.Bonus
The Company agrees to pay to the Contractor an amount equal to $0.20 for each dollar that the Mine's Net Income exceeds $4,400,000."
Clause 10 of the mining agreement deals with security for performance in these terms (omitting inessential parts):
"10.1The Contractor shall provide to the Company an initial cash bond in an amount of $100,000 on or before the Commencement Date ('Initial Bond').
10.2The Contractor shall, on or before 7 December 1996 or any later date agreed to in writing between the parties, provide the Company with an irrevocable bond or guarantee in an amount of $800,000 in a form acceptable to the Company and from a bank or other lending institution approved by the Company. The purpose of the Bond is to guarantee a minimum return of the Mine's Net Income.
10.3Upon due lodgement of the Bond, the Company shall refund the Initial Bond to the Contractor. If through no fault of the Company the Bond is not provided to the satisfaction of the Company on or before 7 December 1996 or any later date agreed to in writing between the parties, then the Initial Bond will be forfeited by the Contractor to the Company and this agreement shall cease and be of no further force or effect.
10.4The Bond shall be held by the Company and continue in force until the Mine's Net Income as recorded by the Company exceeds $800,000 or the Company advises the Contractor that the Bond is no longer required whichever is the sooner.
10.5The terms of the Bond shall include conditions that:
(a)the Company may not claim against the Bond prior to the date 9 months from the Commencement Date (other than in the event of the Mine ceasing to operate for a continuous period of 6 weeks through no fault of the Company);
(b)any amount claimed against the Bond, when aggregated with the Mine's Net Income as at the date of the claim, shall not exceed $800,000; and
(c)the cost (including all stamp duty, registration fees or other taxes, fees and charges) incidental to the provision, maintenance, transfer and re‑transfer of the Bond shall be borne by the Contractor."
I pause to note that a significant feature of the security for performance clause is the provision at the end of cl 10.2 that: "The purpose of the Bond is to guarantee a minimum return of the mine's net income". That term is defined to mean "the amount received by the company in the account name GSW Taylor and ALJ Woodings t/a Taylor Woodings Trust Account with National Australia Bank Ltd BSB 086082 account number 634130341 being the proceeds from the sale of bullion from the mine less the amounts paid by the company under this agreement to the contractor and less the amounts which the company must pay under cl 5.7(c)". Under cl 5.7(c), the company was to be responsible for the cost of repairs to the mill and treatment plant up to a maximum of $100,000.
In due course, arrangements were made by the contractor for provision of a performance bond by FAI General Insurance Company Ltd, the defendant in these proceedings. I will set out the terms of that document in its entirety later. For present purposes, it will suffice to say that at a first glance the defendant seems to have accepted an obligation to pay on demand the sum of $800,000 upon the occurrence of "an event of default", that is to say, "if the aggregate of 'mine's net income' as defined in the contract has not reached or exceeded $800,00 by 1 August 1997." Default cannot occur prior to 1 August 1997 other than in the event of the mine ceasing to operate for a continuous period of six weeks through no fault of the plaintiff.
I pause to observe that although the term "mine's net income" is defined in the mining agreement, as I have already noted, one must turn to the dictionary in order to understand the meaning of "the aggregate of mine's net income". According to the Concise Oxford Dictionary, "aggregate" means the sum total. Thus, in effect, the arrangement was that if the total of the mine's income did not reach or exceed $800,000 by the prescribed date, a demand for payment could be made. Another passage in the Bond provided that the amount claimed, when aggregated with the mine's net income as at the date of the claim, was not to exceed $800,000. In the context of the present dispute, this suggests that if the mine's net income was nil, the liquidator could claim $800,000 (as in fact he did). On the other hand, if, for example, the aggregate of mine's income amounted to $300,000, then the claim would be limited to $500,000. This part of the Bond carried into effect the principle of proportionality mentioned in the contractor's proposal.
The Commencement of Mining
The execution of the mining agreement by the plaintiff and Taylor Barnes cleared the way for mining to commence at the Gordon Sirdar Mine in December 1996. Mr Ryan engaged Mr Houldsworth, a mining consultant, to monitor progress on behalf of the plaintiff. Mr Houldsworth did not have formal qualifications as a geologist but had a background in tenement administration and many aspects of mining operations. He was cross‑examined at some length at the hearing. When his evidence is considered in combination with matters referred to in the Onley report, it is possible to piece together a general understanding as to the way in which the mining work proceeded.
A determination as to whether ore is economic to mine depends principally upon assaying work done in the pit. An analysis of information from various sources assists the miner in determining whether the mining operation can be conducted profitably. This usually brings with it the fixing of a cut‑off grade, implementation of grade controls, and the marking out of the site in blocks so that the excavation of ore is conducted in accordance with a predetermined pattern. In the present case, the ore was to be transported to a treatment plant or mill 45 kilometres away.
It was not entirely clear from the evidence whether Taylor Barnes had determined a cut‑off grade although, as I have already noted, the expectation was, by calculations based on the previous mill operation, that recovery would average 3.9 grams of gold per tonne.
A sketch and other evidence portrayed the sequence of events taking place at the treatment plant or mill. Ore from the mine was fed into a primary crusher and from there it went onwards to two secondary cone crushers and then, via a conveyor belt to the ball mill, Cyclones and the Nelson concentrator. Mill feed samples could be taken from the belt before the feed entered the ball mill and these samples permitted a determination to be made as to the quality of the ore. From the Nelson concentrator, the material in transit was eventually carbon stripped of gold and went to tailings. Sales of gold were effected via Johnson Matthey, with the proceeds of the sales being paid into the plaintiff's bank account in the manner allowed for by the mining agreement. Bank statements received in evidence and a schedule of receipts and payments showed that the first receipt from gold sales via Johnson Matthey was the sum of $11,639.93 received on 13 January 1997. I will return to the schedule of receipts of payments in due course.
In a memo dated 9 December 1996, Mr Houldsworth provided Mr Ryan with "a brief description of systems in place to monitor the amount of ore/waste mined, or carted, or stockpiled and ore treated". He noted that ore was carted to a stockpile at the plant site. From there it is loaded through the crushing plant, with fine product being conveyed to the feed bin. The feed bin feeds on to a conveyer before the lime silo, which also has a weight meter which provides tonnages of ore treated so far. Ore samples are taken daily to determine the moisture content at this point, providing a calculation of the number of dry tonnes. He noted that Taylor Barnes are paid on the number of dry tonnes treated through the mill. His memo contains the observation:
"It should be emphasised that Taylor Barnes only receive payment for ore treated at the Fimtails Plant and if, and only if, there are sufficient funds from the sale of gold produced to meet the call."
Mr Houldsworth attended the site on 18 December 1996 to observe and report on the progress of the mining and processing operation. In a report written the following day he noted that a stockpile of ore (approximately 6,000 tonnes) had been established near the crushing plant which was sufficient to feed the mill for about six days. The crushing plant was experiencing a few "teething problems", the Nelson concentrator had been replaced, stripping and smelting was to be done off‑site initially but was to be returned on site after certain modifications had been made. His overall view of the plant was "that it was all happening as it should", although in his view the month of December would essentially be a "shake down month".
Mr Houldsworth was conscious that Taylor Barnes had their work cut out in reorganising the pit layout as a consequence of last ditch efforts to win the high grade ore under the previous mining operation. In his view "Taylor Barnes' experience in the mining game has so far enabled them to do what would daunt some mining contractors and certainly shames Roehampton's management ability". He envisaged that the new mining operation would be completed within eight months. He was not provided with in‑pit assay information but was informed by Mr Taylor and Mr Barnes that the in‑pit assay showed that the grades were economic. This information seemed to be consistent with the earlier reports, including the Onley valuation report. Further, Mr Houldsworth considered that Taylor Barnes would have had no interest in treating what they thought was sub economic ore.
Mr Houldsworth acknowledged that grade control done before the ore is mined and estimations of the grade of the ore in various sections of the pit (which may well vary from block to block) will not necessarily be reflected in the grade of ore taken to the mill. This can only be determined once the ore has been processed. It is for this reason that further assays are always done on the belt leading into the mill. However, at this stage it is too late to change the processing of the ore. The belt assays are used to measure against the gold going to tails, gold in circuit and the extracted gold. Any discrepancies in these amounts show problems in the recovery of gold from the ore or in the grade control in the pit. However, in the meantime, the ore has to be processed. Some gold will inevitably be trapped in the system. In relation to this sort of mining, one cannot make a determination on the profitability of ore on one or two days because on one day the ore will come in over budget and on another it comes in under budget. This is a result of the uncertainties involved in grade control, dilution of the ore during the process of mining, and variation in processing results.
Mr Taylor provided Mr Ryan with a progress report in a memo dated 3 January 1997. His summary revealed that to that point 9,700 dry tonnes had been processed through the mill, in respect of which there were calculated to be 16,723 grams gold in the feed and 13,528 grams of gold recovered. All ore treated to date had come from existing stockpiles, being a mixture of medium and low grade ore. The contractor was about to commence treating ore from the pit. Mr Taylor noted that the contractor's efforts had principally been directed to recommissioning the mill which was classed as operational on 16 December 1996. He said that Mr Ryan would be receiving a daily report from the mine and the mill, such report showing that "it is our intention to lift the head grade to an average of 3.5 grams per tonne and commence stripping our [sic] carbon at a rate of 1.5 tonne per day".
A few days later, Taylor Barnes submitted to Mr Ryan Invoice 1 dated 6 January 1997 in respect of 9,700 dry tonnes milled in the period 1 December to 31 December 1996. When the payment formula prescribed by the mining agreement for 20,000 dry tonnes was applied to the quantum actually milled, the sum of $416,426 was said to be due. The invoice then brought to account a notional recovery of the sum of $100,000 for mill recommissioning outlaid by the contractor to show $516,426 being due. After deduction from this amount of the sum of $300,000 for environmental and rehabilitation bond provided for by the contract, the amount claimed via the invoice was the sum of $216,426. Mr Ryan was of the opinion that, provided he had sufficient funds in hand from sale receipts, he was required to pay Taylor Barnes the amount claimed.
Soon afterwards, Mr Ryan received a report dated 21 January 1997 prepared by Mr George Fisher, who described himself as an adviser to Taylor Barnes. The report was said to be based on the first thirteen bars poured in the period from 9 January 1997 to 20 January 1997. The report noted that the nature of the contract was such that revenue "has to be provided to the liquidator to enable Taylor Barnes to be paid". The author of the report also noted that revenue provided to the liquidators was behind schedule, this being due to several factors, namely, the late start in December, the retention of gold in the traps and in the mill circuit, and some inadequacies in the crushing system with the result that low grade ore had to be used. His conclusion was that "the project can now expect to achieve constant revenue as intended even though the price of gold has reduced".
Mr Fisher went on to observe that under the contract the first $300,000 had to be paid as a security for future requirements of the Department of Mines. This was not expected to be removed at the start of the contract when most of the mobilisation and plant start‑up costs were being incurred, causing a considerable shortfall in income. This latter point led to some further negotiations between the parties.
By letter dated 27 January 1997, Mr Ryan wrote to Taylor Barnes in terms evidencing an awareness on both sides that "expected gold receipts have been slower than originally forecast however you have advised receipts should now quickly reach the original expected level". Against this background, Mr Ryan said that he was willing to agree to the contractor's request that the initial gold receipts would be split 50/50 between the plaintiff and Taylor Barnes until the plaintiff had withheld $300,000, and thereafter the contract would operate as originally agreed. I note in passing from the schedule of receipts and payments that as at 27 January receipts from gold sales paid to Mr Ryan amounted to $174,296.65. Payments to Taylor Barnes to that point amounted to $70,000, leaving a balance in the liquidator's bank account of $104,296.65.
Mr Ryan said in evidence that, on the basis of what he read in the Fisher report and what he was being told by Mr Taylor, Mr Fisher and Mr Houldsworth, he considered that Taylor Barnes had encountered some starting‑up problems and that things would improve. He believed that the cause of low recoveries were problems with the mill, which were being rectified, not problems with the grade of the ore being extracted from the mine. He had in his possession the Onley report which, in Mr Ryan's opinion, supported the view that the mining was profitable.
Mr Ryan then received a Taylor Barnes Invoice No 4 dated 30 January 1997 showing the total due to be the sum of $466,614. This replaced Invoice 1 in order to reflect the recently negotiated arrangements between the parties concerning the amount withheld. At about this time, on 3 February 1997, Mr Ryan received a fax from Mr Taylor setting out the list of average grades and ore reserves referable to the mining pattern in the pit. The remaining ore reserves were said to be 286,590 and the average grade was said to be 3.57 grams per tonne. The list from which the average grade is derived portrays various grades ranging from 2.97 at the lowest end to 4.65 at the highest end. By fax dated 5 February 1997, Mr Taylor provided a forecast tonnage and revenue for February 1997 indicating that 22,982 tonnes would be processed over 28 days. The mill was said to be operating at 38 tonnes per hour, working at 90 per cent availability. The fax described the current gold recovery and contained a total gold revenue forecast of $959,058.52.
I digress briefly to note that there was some controversy at the hearing as to whether, at this stage, Mr Ryan and Mr Houldsworth or either of them were receiving copies of mill daily production reports containing details of the processing operations. The defendant's stance was that a close inspection of the relevant reports or, in any event, specific inquiries made by Mr Ryan or Mr Houldsworth, would have established that the gold grade averaged was seldom in excess of 2 grams per tonne, sometimes less than 1.50 grams per tonne and often in the vicinity of 1.75 grams per tonne. In other words, gold was being recovered at a rate substantially less than the rate of 3.9 grams per tonne estimated in the contractor's original proposal. On the defendant's case, information of this kind put Mr Ryan and his agent Mr Houldsworth on notice that the ore being mined did not contain gold (to use the language of the mining agreement) "in such quantities as to make its extraction profitable in the reasonable view of the company". I will return to this aspect of the dispute later.
By fax dated 6 March 1997, Mr Taylor advised Mr Ryan that over the previous three weeks major problems had been experienced in reconciling the grades coming out of the mine with recoveries from the plant. The contractor had assumed the mill was the problem, but after extensive metallurgy tests it seemed that the plant was operating efficiently. He said that assays from sample drilling at the mine had indicated that certain ore blocks were over 3.5 grams per tonne but resampling had revealed lower grades than was first assayed. Hence, after several more tests, it was decided not to continue removing ore from the mine until a determination was made as to what was happening with the pit grades. He said that "the mill is currently out of ore although we still have material on the ore pad, at this stage it would not be economical to treat." By a subsequent fax dated 8 March 1997 he referred to ongoing sampling at the pit and an intention to take on an equity partner who would supply sufficient funding to enable a continuance of operations in an efficient manner. A Taylor Barnes' Invoice No 10, dated 10 March 1997, referred to 18,395 dry tonnes milled in the period 1 January to 28 January 1997 and claimed as due the sum of $725,794.10.
Mr Ryan said in evidence that at this time he was concerned with the cash flow position of the contractor but still believed in the project. Mr Taylor had told him that there were various problems with the mill and with carbon stripping and that things would improve. Mr Houldsworth provided him with a written review of performance to 28 February 1997 which referred to below grade ore being delivered to the mill as a result of inadequate grade control at the pit. The Houldsworth February report noted that gold produced had fallen far short of the forecast and was in fact substantially below break even point. Gold receipts amounted to $635,441 in total but the average grade was only 1.83 grams per tonne to 28 February 1997. The report includes this passage:
"With Roehampton's receipts totalling $635,000 and approximately $450,000 as gold in circuit we come reasonably close to the estimate calculated from averages."
Nonetheless, Mr Houldsworth concluded that unless Taylor Barnes could resolve its various difficulties and deliver a minimum of 3 grams ore to the mill, lift the recovery rate percentage and increase the stripping capability, they would not have much of a future. His view was that the month of March would make or break the operation. Hence, the liquidator should show Taylor Barnes "a little more forbearance" but monitor the situation closely over the next four weeks.
The schedule of receipts and payments reveals that total receipts from gold sales amounted to $653,690.66 with the last receipt being brought to account on 19 March 1997. Payments made by the liquidators to Taylor Barnes amounted to $503,000. This left a balance in the account of $150,690.66 as at 19 March 1997. Mr Ryan said in evidence that as a rule of thumb he aimed at keeping in the account the sum of $150,000 as the amount to be withheld under the revised arrangements concerning rehabilitation. His practice was to make payments to Taylor Barnes as the proceeds of the gold sales were received. He carried in his mind the notion that the plaintiff was not really at risk in that the mining agreement was based upon the premise that the contractor would not be paid unless gold had been produced and the proceeds of sale were available to meet amounts due to the contractor.
Mr Ryan said that a stage was reached when it became apparent that the mining operation conducted by Taylor Barnes had come to an end without the desired revenue being generated. It became necessary for the liquidators to resort to the Performance Bond. There was a considerable degree of controversy at the hearing as to the manner in which Mr Ryan, assisted by Mr Houldsworth, monitored the conduct of the mining operation and as to the exact state of account between the plaintiff and the contractor. Again, I will return to this aspect of the matter in due course.
It is apparent from a memo dated 4 April 1997 from Mr Houldsworth to Mr Ryan that at a meeting held on the previous day Taylor and Barnes contended that they had resolved their problems and wished to recommence operations. They were aware that they needed to recover a minimum of 3 grams per tonne in order to be viable. According to Mr Houldsworth, Taylor Barnes had two options, namely, to accept defeat and acknowledge insolvency or recommence the operation. It was common ground at the hearing before me that the operations could not be recommenced. This led, initially, to Mr Ryan, on behalf of the liquidators, issuing a notice of demand dated 21 May 1997 directed to the defendant reciting that an event of default had occurred under the Performance Bond. On this occasion, the event of default mentioned in the notice was that the mine had ceased to operate for a continuous period of six weeks through no fault of the principal. The mine's net income was said to be nil, with the result that demand was made for $800,000 in the manner contemplated by the Performance Bond.
In the following weeks and months, steps were taken by Mr Houldsworth on behalf of the liquidators to clean up the mill and to recover gold trapped in the system. Various documents evidence the steps that were taken, including a memo dated 18 July 2000 from Mr Houldsworth to Taylor Woodings describing the various forms of recovery and the amounts recovered. There was a considerable degree of controversy between the parties to these proceedings as to the manner in which these recoveries should be dealt with in determining exactly what revenue was generated by the ill‑fated mining operation. A question arose as to whether certain amounts referable or notionally referable to gold recovered during the clean up should have been brought to account in determining the mine's net income prior to any attempt being made by the liquidators to enforce the Bond on the basis that the aggregate of the mine's net income had not reached or exceeded $800,000 by 1 August 1997. I will return to this controversy later.
For the time being, suffice it to say that in due course the liquidators proceeded to issue a further notice of demand, being the notice of demand relied upon by the plaintiff in its statement of claim. The relevant notice of demand is dated 4 August 1997 and recites that an event of default has occurred in that the aggregate of the mine's net income has not reached or exceeded $800,000 by 1 August 1997 "and is nil". Demand was therefore made for the immediate payment of $800,000 by FAI to the principal.
I pause to note that, according to par 7 of the statement of claim, the aggregate of "mine's net income", as at 1 August 1997, was said to be nil in that the aggregate of the total amount received by the plaintiff into the nominated bank account from the sale of bullion was $653,690.66, this amount being reduced to nil by bringing to account the sum of $503,000 paid by the plaintiff under the mining agreement and the sum of $150,690.66 deducted and retained by the plaintiff as security for performance of the contractor's rehabilitation obligations. These figures are drawn from the schedule of receipts and payments I mentioned earlier.
The plaintiff pleaded further, in par 9, that on 5 August 1997 the defendant refused to make payment of the sum demanded under the Performance Bond and since that time has failed to pay the sum demanded or any sum. In the premises, it is alleged that the defendant has breached the terms of the Performance Bond with the result that the sum of $800,000 is due and payable to the plaintiff, together with damages for late payment in the form of interest on the said sum.
Before leaving this review of the evidence I note in passing that although the two principal witnesses for the plaintiff, Mr Ryan and Mr Houldsworth, were subjected to extensive cross‑examination as to their state of knowledge about the mining project during various phases of the mining operation, and about the factual basis of their beliefs and understanding concerning matters such as profitability and the commercial prospects of the venture, no witnesses were called on behalf of the defendant. It was apparent from the way in which the case was conducted at trial that the defendant relied upon the basic rule that the burden of proof lay upon the plaintiff to establish each constituent of its case on the balance of probabilities.
Overview of issues
The structure of the plaintiff's statement of claim will by now be apparent. The plaintiff pointed to various provisions of the mining agreement and the Performance Bond and claimed from the defendant the sum of $800,000 as money due and payable under the Performance Bond. The defendant did not deny the existence of these agreements, but pleaded various facts and matters by way of defence in order to raise the issues that I will come to in a moment. I note in passing at this stage that in par 4 of its defence the defendant pleaded that as at 1 August 1997 the mine's net income was said to be at least $653,690.66, this being the figure representing receipts from gold sales as it appears in the schedule of receipts and payments mentioned earlier. This set the scene for a defence argument that on any view of the matter the plaintiff was not entitled to claim the maximum allowable under the Performance Bond of $800,000. By way of a counterclaim, the defendant sought a declaration that the mining agreement was void for uncertainty. It also sought a declaration that any liability the defendant might have had under the Performance Bond has been discharged in that the Performance Bond should properly be characterised as a guarantee and the obligations under the guarantee had been discharged by a material alteration to the mining agreement.
Before turning to the particular issues raised by the defence, it will be useful to stand back and look at the matter in overview. It follows from the preceding narrative, and this preliminary description of the pleadings, that the plaintiff, as a company in liquidation, sought to obtain a return of not less than $800,000 from certain mining tenements as a consequence of representations made by a third party contractor, Taylor Barnes, that a viable mining operation could be conducted on the subject tenements. This was not in the nature of a joint venture because the plaintiff was in liquidation. It was an arm's length transaction between two parties who wished to salvage something of value from the ruins of the earlier mining operation, and with both parties being aware that there were risks involved.
The plaintiff's case was argued on the basis that there were sufficient commercial incentives on both sides to make the Taylor Barnes' proposal workable. Taylor Barnes would receive a financial reward if it mined efficiently. The plaintiff was not at risk, and therefore arguably did not have a need to monitor the contractor's performance, because payments to the contractor were, in effect, conditional upon gold being produced and receipts from gold sales being available to meet payments due to the contractor.
Further, according to the plaintiff, the underlying purpose of the Performance Bond was neatly and aptly expressed in cl 10.2 of the mining agreement: "The purpose of the Bond is to guarantee a minimum return of the mine's net income". In other words, the plaintiff was only prepared to turn the tenements to account in the manner proposed by the contractor if it could be assured of a minimum return of $800,000, being the amount specified by the Performance Bond subsequently entered into between the parties to the present proceedings.
The defendant says in answer to the plaintiff's general contention as to the nature of the arrangements between the parties, that under the mining agreement on its proper construction the plaintiff had an obligation to assess the profitability of the material extracted by Taylor Barnes prior to the time at which Taylor Barnes was entitled to payment under the mining agreement. If there were no qualification as to the quality of the ore that could be mined, it would mean that the defendant by the Performance Bond had agreed to pay for 20,000 dry tonnes of ore of any quality at the end of each four week mining period. Such an interpretation of the relevant documents would mean that, essentially, the defendant was being required to guarantee the profitability of a mining venture irrespective of whether the miner extracted and processed waste or whether the miner extracted and processed ore with some valuable mineral content.
These different views about the nature of the underlying transaction constituted by the mining agreement, and about the proper interpretation to be placed upon the related Performance Bond, gave rise to a number of discrete issues on the pleadings. The respective views may ultimately prove to have a bearing upon the manner in which the various issues are resolved.
The first issue to be addressed is whether the Performance Bond, upon its proper interpretation, requires that a properly expressed demand for payment should be met irrespective of whether there was actually an event of default under the mining agreement. I will call this the "sufficiency of bare demand issue".
Second, if it be held that a bare demand is not sufficient, a question arises as to whether the plaintiff can satisfy the court that an event of default did actually occur, that is to say, that the mine's net income as defined in the mining agreement did not reach or exceed $800,000 by 1 August 1997. I will call this the "actuality of event of default issue".
I digress briefly to note that various subsidiary issues must be dealt with under this heading. The plaintiff's case is that, upon proper analysis, the mine's net income was nil in that the plaintiff was entitled to set‑off against the receipts of $653,690.66 the sum of $503,000 paid to the contractor and the amount withheld for rehabilitation with the result that the net income was nil.
The defendant responds by saying that the event of default depends upon a calculation being made in order to determine whether the mine's net income failed to reach the prescribed level. The calculation in question could only be made if there were proper performance of the mining agreement on both sides, but in fact there was no proper performance by the plaintiff because it made payments which were not in respect of "ore", in that material was mined which was not profitable in the reasonable view of the plaintiff (that being the special meaning of "ore" in the circumstances of this case as set out in the mining agreement). Hence, there is an evidentiary issue to be resolved between the parties as to whether the ore being processed by Taylor Barnes could properly be regarded as profitable.
On the defendant's case, if the payments of $503,000 made to Taylor Barnes were wrongly made, being payments in respect of unprofitable ore, then these payments could not be set off against the receipts with the result that the mine's net income was not nil but the sum of $653,690.66 representing the receipts. Thus, the event of default relied upon in the notice of demand had not occurred as at 4 August 1997. In the absence of a valid notice of demand, no amount was payable. By par 8 of its defence, the defendant denies it is liable to make any payment under the Performance Bond.
Further, the defendant puts the plaintiff to the proof of the aggregate of mine's net income with a view to establishing that, on any view of the matter, the plaintiff is not entitled to the full amount of $800,000 claimed. In other words, the defendant argued in the alternative under par 8 of its defence that, in any event, the minimum return of $800,000 by 1 August 1997 had been achieved if one added to the figure of $653,690.66 in respect of receipts the value of gold recovered during the clean up. Putting it another way, the defendant says that on any view of the matter, the court cannot be satisfied that the mine's net income was nil as at 1 August 1997. I will call this subsidiary issue the "quantum issue".
Third, the defendant has pleaded in par 6 of its defence that the terms of the mining agreement determinative of the calculation of mine's net income are so difficult to decipher or elucidate that no contractual effect can be given to them with the result that the mining agreement is void for uncertainty so as to make the Performance Bond unenforceable. I will call this the "uncertainty issue".
Fourth, the defendant relies upon a reference to a guarantee in cl 10.3 of the mining agreement as a basis for arguing that the Performance Bond should properly be characterised as a guarantee. The defendant goes on to say that it is discharged from liability on the grounds that there was a material variation to mining agreement as the principal agreement. The matters relied on are the matters pleaded in par 13 to par 14 and par 16, namely, that the obligations of Taylor Barnes concerning rehabilitation were varied or, alternatively, the plaintiff's conduct in making payments for material produced by Taylor Barnes, which was then known by the plaintiff not to be profitable, and the contractor's acceptance of such payments, amounted to a material variation which affected the liability of the defendant under the Performance Bond. This entitled the defendant to be discharged from its obligations under the Bond. I will call this the "discharge of guarantee by material alteration issue".
Before resolving the first of these issues it will be useful to begin by taking a more detailed look at the terms of the Performance Bond and notice of demand dated 4 August 1997. It will also be useful to look at some of the previously decided cases casting light on the nature of performance bonds.
The Performance Bond
The plaintiff has pleaded in par 8 of the statement of claim that pursuant to the Performance Bond the plaintiff demanded immediate payment by the defendant of the sum of $800,000 on 5 August 1997. The defendant responded in par 7 of its defence by admitting that the plaintiff made demand but denying that the plaintiff was entitled to do so under the Performance Bond. The demand made by the plaintiff was in these terms (omitting inessential parts):
"By a Performance Bond dated 6 November 1996 ('the Bond') FAI has unconditionally undertaken to pay on demand, which demand the Principal may only make following the occurrence of an event of default as defined in the Bond, any sums which may from time to time be demanded by the Principal to a maximum aggregate sum of $800,000 ('the sum').
Notice is hereby given that:
(a)an event of default has occurred under the Bond in that the aggregate of 'Mine's Net Income' (as defined in the Contract) has not reached or exceeded $800,000 by 1 August 1997 and is nil;
(b)the Principal desires payment to be made of the whole of the Sum; and
(c)demand is made for the immediate payment of $800,000 by FAI to the Principal."
It now becomes necessary to set out the terms of the Performance Bond in its entirety in order to grasp the implications of the plaintiff's demand.
The Performance Bond was in these terms (omitting the signatures):
"BY:FAI General Insurance Company Limited ACN 000 327 855 of 185 Macquarie Street, Sydney NSW 2000
TO:Michael Ryan and ALJ Woodings as Liquidators of Roehampton Developments Pty Ltd (in liquidation) ACN 058 507 485
CONTRACT: The Mining Agreement in respect of the Gordon Sirdar Mine and treatment plant executed between Roehampton Developments Pty Ltd and Taylor Barnes Pty Ltd on 19 November 1996
At the request of Taylor Barnes Pty Ltd ACN 074 725 692 ('Contractor') and in consideration of Michael Ryan and ALJ Woodings as Liquidators of Roehampton Developments Pty Ltd ('Principal') accepting this Undertaking in relation to the obligation of the Contractor to provide to the Principal security for the purpose of ensuring the due and proper performance of the Contractor's obligations under the Contract, FAI GENERAL INSURANCE COMPANY LIMITED ('FAI') unconditionally undertakes to pay on demand, which demand the Principal may only make following the occurrence of an event of default as defined in the next paragraph, any Sums which may from time to time be demanded by the Principal to a maximum aggregate sum of Eight Hundred Thousand Dollars ($800,000.00) ('Sum').
For the purpose of the preceding paragraph an event of default occurs if the aggregate of 'Mines Net Income' as defined in the Contract has not reached or exceeded $800,000.00 by 1 August 1997.
Default cannot occur prior to 1 August 1997, other than in the event of the 'Mine' (as defined in the Contract) ceasing to operate for a continuous period of six (6) weeks through no fault of the Principal.
Any amount claimed against this Bond when aggregated with the 'Mines Net Income' as at the date of the claim, shall not exceed $800,000.00
This Undertaking is to continue until notification has been received from the Principal that the Sum is no longer required by the Principal or until this Undertaking is returned to FAI or until payment to the Principal by FAI of the whole of the Sum or such part as the Principal may require. Should FAI be notified in writing purporting to be signed by or on behalf of the Principal setting out the basis of the default that the Principal desires payment to be made of the whole or any part or parts of the Sum, it is agreed that such payment or payments will be made to the Principal forthwith without reference to the Contractor and notwithstanding any notice given by the Contractor to FAI not to pay same, provided always that FAI may at any time without being required to do so pay to the Principal the Sum less any amount or amounts it may previously have paid under this Undertaking or such lesser amount as may be required and specified by the Principal and thereupon the liability of FAI hereunder shall immediately cease and determine. It is a condition of the issue by FAI of this Undertaking that the Principal shall only apply any amount paid by FAI under this Undertaking for the purpose of ensuring that the Contractor's obligations under the Contract are carried out, and if there is any surplus remaining after the obligations of the Contractor under the Contract have been discharged, the Principal shall repay any such surplus to FAI."
Nature of Performance Bonds
The decided cases in this area of the law focus upon the question of whether a document characterised as a performance bond creates absolute obligations, that is to say, whether a bank or other party providing a bond or bank guarantee is not and should not be concerned in any way with the rights and wrongs of the underlying transaction. Is payment under the relevant document to be regarded as conditional simply upon the presentation of a demand or other document asserting that an event of default or other activating event has occurred; or is proof required that the event of default or activating event has actually happened?
In Howe Richardson Scale Co Ltd v Polimex‑Cekop & National Westminster Bank Ltd [1978] 1 Lloyds Rep 161, Roskill J considered that the bank in that case was not bound to inquire into whether there had been a timeous performance of the seller's obligations under the subject contract.
In Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 Lloyds Rep 166; [1978] 1 QB 159 Lord Denning MR noted that a performance bond is a "new creature". It has many similarities to a letter of credit in that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit.
These observations led Lord Denning MR to the conclusion that a bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or condition. The only exception is when there is a clear fraud of which the bank has notice.
In Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyds Rep 546 the bond provided that "We undertake to pay the set amount on your written demand in the event that the supplier fails to execute the contract in perfect performance …". It seemed that there were three possible meanings for that wording being (a) that no more than a written demand was required, (b) that the demand must assert a failure to perform the contract, or (c) that there must in fact have been a failure to perform.
The Court of Appeal unanimously rejected the third solution. Ackner LJ said at 549:
" … if the performance bond was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could never safely be made by the bank except on a judgment of a competent court of jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely, to enable the beneficiary to obtain prompt and certain payment."
Pursuant to this line of reasoning, the second possibility was adopted by Ackner LJ with whom Glidewell LJ agreed (but not by Neill LJ), that is to say, that it was necessary, but sufficient, that the demand simply asserted a breach of contract. This meant that the beneficiary of the term was obliged to state in plain terms that which he must, if honest, be prepared to assert, that there had been a failure to perform the contract.
A review of these previously decided cases undertaken by Hirst J in Siporex Trade SA v Banque Indosuez [1986] 2 Lloyds Rep 146 prompted the learned Judge to say that all three of the leading Court of Appeal cases were the strongest authority "in favour of the proposition that the bank guarantor is not and should not be concerned in any way with the rights and wrongs of the underlying transactions". He went on to note, however, that every bond has to be construed in accordance with its terms, and there can be no blind categorisation of its character or blind assumption of the obligations which it creates. In the case before him, he could see nothing in the subject performance bond to differentiate it from a number of those quoted in the previously decided cases, particularly that in the Esal case (supra) or to justify a departure from the general principles laid down in those cases.
Hirst J then made these observations at 158:
"The whole commercial purpose of a performance bond is to provide a security which is to be readily, promptly and assuredly realizable when the prescribed event occurs; a purpose reflected in the provision here that it should be payable 'on first demand'. The defendants' approach in this part of the case would frustrate that essential purpose.
There is in my judgment no real hardship on the bank in imposing this strict liability to pay. A performance bond is a commercial instrument. No bank is obliged to enter into it unless they wish to, and no doubt when they do so they properly exact commercial terms and protect themselves by suitable cross‑indemnities such as were entered into in the present case.
For all these reasons I hold that the obligations under these two performance bonds were absolute."
A further and more recent review of cases in this area of the law was undertaken by the court in I E Contractors Ltd v Lloyds Bank (1990) 51 BLR 1. The court in that case made various observations on principles to be applied in the construction of performance bonds. According to the head note, there is a bias or presumption in favour of a construction which holds a performance bond to be conditional upon documents rather than facts but that presumption is not irrebuttable if the meaning is plain.
The approach reflected in these cases is broadly consistent with views expressed by the High Court in Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443.
In that case a condition in a contract for the construction of a pipeline required the contractor to provide a cash security or, alternatively, a bank guarantee as security for the contractor's due and faithful performance of the work. A second condition entitled the owner to retain 10 per cent of the progress payments due to the contractor until the work had been performed and accepted in accordance with the contract. The owner, at the contractor's request, agreed to accept a bank guarantee in lieu of the moneys retained. By each of the guarantees, the bank unconditionally undertook to pay the owner on demand any sum up to the limit specified in each guarantee. When the work was almost complete the owner demanded payment from the bank under the guarantees.
The High Court held that the owner was entitled to demand and be paid the amount of the performance guarantees whether or not there had been a want of due and faithful performance of the work.
Stephen J made certain observations concerning the nature of performance bonds in these terms at 457:
"Once a document of this character ceases to be the equivalent of a cash payment, being instantly and unconditionally convertible to cash, it necessarily loses acceptability. Only so long as it is 'as good as cash' can it fulfil its useful purpose of affording to those to whom it is issued the advantages of cash while involving for those who procure its issue neither the loss of use of an equivalent money sum nor the interest charges which would be incurred if such a sum were to be borrowed for the purpose. Being 'as good as cash' in the eyes of those to whom it is issued is essential to its function. In Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 Lord Denning recently described the performance guarantee as standing 'on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. …[It] must pay according to its guarantee, on demand, if so stipulated, without proof or conditions'. That their constant equivalence to cash, awaiting only a demand before materializing as cash, was precisely the purpose of the guarantees in the present case clearly appears from the terms of the construction contract which here gave rise to two of them and from the dealings between contractor and Authority which brought the other two into existence.
Accordingly the Bank was, in my view, obliged to pay in accordance with the Authority's demands made under the guarantees issued to it by the Bank; it was irrelevant to the existence of this obligation on the part of the Bank whether the giving of any of those demands involved the Authority in breach of contract with the contractor."
Gibbs J made these observations at 451:
"By each of the bank guarantees, the Bank 'unconditionally' undertakes 'to pay on demand' the sum demanded up to the limit specified in the bank guarantee. To hold that the bank guarantees are conditional upon the making of a demand that conforms to the requirements of the contract between the Authority and the contractor would of course be quite inconsistent with the express statement in the bank guarantees that the undertaking of the Bank is unconditional. To hold that the Bank should not pay on receiving a demand, but should be bound to enquire into the rights of the Authority and the contractor under a contract to which the Bank was not a party would be to depart from the ordinary meaning of the undertaking that the Bank is to pay on demand. It would be contrary to the settled rules governing the implication of terms in contracts to imply provisions that would contradict the ordinary meaning of the words of the bank guarantees in this way."
In Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 a builder contended that, on a proper construction of the contract, resort to the security was subject to a qualification that the owner's entitlement to time damages must be undisputed and that, as there were serious questions to be tried in relation to that entitlement, the owner had no right to call on the subject letters of credit.
The Court of Appeal held that the terms of the contract showed that the commercial purpose of provision of the standby letters of credit under the agreement was to allocate the risk of a party being out of pocket pending a resolution of any dispute and therefore that the owner was entitled to call on the securities even where a genuine dispute existed concerning the entitlement of the owner to time damages.
Charles JA indicated at 821 that the critical question was whether the relevant commercial purpose of the agreement was to provide security to Varnsdorf, so that a valid claim to damages (whether or not time damages) would be secured; or whether clauses such as 3.13 creating an obligation to pay time damages where the plant for any hospital did not reach the stage of hand‑over by the date for hand‑over made provision for an allocation of the risk between the construction company and Varnsdorf - showing which party was to be out of pocket pending resolution of any dispute. In his view, the terms of the agreement showed that the commercial purpose of the agreement was to provide an allocation of risk and that Varnsdorf was entitled, under cl 3.13 to call on the security provided by Fletcher notwithstanding that there was a genuine dispute and a serious issue to be tried as to whether hand‑over had been reached.
Charles JA went on to say at 823 that on the proper construction of the relevant clauses, the requirement in the letters of credit was for the declarant to declare "an amount or amounts remaining unpaid", in this case the amount demanded under the cl 3.13(b) notice. In his view there was no express or implied requirement that this be "an undisputed amount or amounts". He went on to say at 823:
"On the contrary it seems to me that the parties have precisely agreed that the making of a statement that 'an amount or amounts remains unpaid' is sufficient in the declaration".
A different view of the matter was taken in Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (1991) 23 NSWLR 451. In that case a building contract provided for security to be given for the purpose of ensuring the "due and proper performance of the contract" by the contractors. A performance bond was issued in unconditional terms but incorporating cl 5.6 of the building contract whereby "if the principal becomes entitled to exercise all or any of his rights under the contract in respect of the security the principal may convert into money the security that does not consist of money …"
Rolfe J held that the bond, incorporating the terms of the building contract, could only be called upon if the defendant became contractually entitled to exercise its rights under the contract in respect of the security and this had not occurred. In arriving at that conclusion, Rolfe J distinguished Wood Hall (supra) and followed Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales [1982] 1 AustConst LR 81. The essence of Rolfe J's reasoning was that in circumstances where the bond incorporates the terms of the contract, then the effect of this requires one to look at the underlying contractual position as between the plaintiff and the defendants.
Against the background of these previously decided cases, counsel for the plaintiff in the present case submitted that the Performance Bond in question was in the nature of a bond payable on demand. It could not be characterised as a guarantee. The Performance Bond, according to its terms, required no more than a written demand, but with the written demand asserting the basis of default. He submitted that the notice of demand in the present case had been framed accordingly and did assert the basis of default, namely, that the mine's net income had not reached or exceeded $800,000 by 1 August 1997 and was nil. There was no need to look at the underlying contractual position between the plaintiff and Taylor Barnes.
Counsel for the plaintiff underpinned these submissions by drawing attention to various features of the Performance Bond in the present case. He submitted that the notion that a demand could be made "following the occurrence of an event of default", strongly suggested that the only requirement was that there be a notice of demand asserting a failure to perform. It was not necessary to demonstrate that there had been a failure to perform in fact. He placed particular emphasis upon the concept that payment was to be made "forthwith without reference to the contractor". This suggested the defendant was obliged to make the payment without reference to any dispute arising under the underlying transaction. Further, the defendant's view of the matter was not only inconsistent with the object of the transaction between the plaintiff and the defendant, namely, to enable the plaintiff to obtain prompt and certain payment, but also was inconsistent with the wording of the document itself.
The defendant acknowledged that there was no dispute that a demand was made. It submitted, however, that the "event of default" which triggers the entitlement to make demand required proof by the plaintiff that the aggregate of "mines net income" (as defined by the mining agreement) pursuant to which the Performance Bond was issued did not reach $800,000 by 1 August 1997.
More particularly, it was the defendant's case, according to its written submissions, that there was no "event of default" because:
"4.a. there can be no 'event of default' if the 'mines net income' is unable to be aggregated as required under the Contract;
b.the aggregate of 'mines net income' is the difference between the proceeds of sale received from bullion from the mine and the amounts paid by the plaintiff to Taylor Barnes Pty Ltd ('Taylor Barnes') pursuant to the following payment structure:
i.Taylor Barnes is entitled to $782,900 for every 20,000 dry tonnes of 'Ore' produced - see clause 4 of the Contract and clause 2 of Schedule 2 on page 20 of the Contract;
ii.the plaintiff can only pay Taylor Barnes these monies on receiving an invoice for the production of 20,000 dry tonnes of 'Ore';
iii.'Ore' is defined at page 2 of the Contract as including 'all earth, rock or other materials of a like nature within the area of the Mine which contain gold or any other mineral in such quantities as to make its extraction profitable in the reasonable view of the Company';
iv.payment for 'Ore' production, if less than or more than 20,000 dry tonnes, must be adjusted according to clause 3 of Schedule 2 on page 20 of the Contract ie either an additional $35.58 per dry tonne or a $35.58 reduction per dry tonne;
c.if the plaintiff paid Taylor Barnes for something other than 'Ore' as defined in the contract, then it is not a payment that is relevant for the purposes of aggregating 'mines net income';
d.the plaintiff did not pay Taylor Barnes for 'Ore' - the material produced by Taylor Barnes and in relation to which it rendered invoices did not contain 'Ore' as defined under the Contract ie 'gold or other minerals in such quantities as to make its extraction profitable in the reasonable view of the Company'."
The defendant contended, in the alternative, as appears in par 5 of its defence, that on a proper construction of the Contract, the plaintiff had an obligation to assess the profitability of the material produced by Taylor Barnes at a time prior to the time at which Taylor Barnes was entitled to payment. An obligation of this kind could be regarded, in any event, as an implied term of the mining agreement. Given that the mining agreement by cl 10.2 required the Performance Bond "to guarantee a minimum return [of $800,000]", if the plaintiff ignored its obligations under the mining agreement which determined the ultimate calculation of Mines Net Income, then the making of the calculation itself became impossible.
The defendant submitted further that if the material in relation to which Taylor Barnes had rendered invoices was not Ore, then the plaintiff should have refused payment until Taylor Barnes produced material that was Ore. This view of the matter was fundamental to the risk undertaken by the defendant in issuing the Performance Bond. The plaintiff's breach of its obligations under the mining agreement meant that payments had been made to Taylor Barnes which were not due and payable with the result that the mine's net income could not be described as nil. The event of default required by the Performance Bond had not occurred.
The defendant also made various submissions concerning the effect of the previously decided cases. It acknowledged that various cases such as Wood Hall Ltd v The Pipeline Authority (supra) and Esal (Commodities) Ltd v Oriental Credit Ltd (supra) concerned unconditional bonds in which proof of breach by the contractor was held to be irrelevant to the guarantor's liability under the bond. In these cases, the defendant was liable simply on the making of a demand.
Nonetheless, on the plaintiff's own case as pleaded, those cases were distinguishable. By its statement of claim, the plaintiff assumed the onus of proving a default by Taylor Barnes under the Contract (ie that Mines Net Income was nil) so as to trigger its entitlement to make demand.
The defendant went on to submit that in Wood Hall Gibbs J (at 452 and 454) Stephen J (at 459) recognised the possibility that the principal contract pursuant to which the performance bond was issued could qualify the beneficiary's right to make demand under the bond itself. The existence of such a qualification has resulted in the courts restraining beneficiaries from making demands under performance bonds where the qualification conditioning the making of demand under the principal contract had not been met. In this regard the defendant referred to Pearson Bridge (NSW) Pty Ltd v State Rail Authority of New South Wales (supra); Barclay Mowlem Construction Ltd v Simon Engineering (Australia) Pty Ltd (supra); Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd (supra). In Fletcher Construction, the defendant contended, Callaway JA indicated that a condition limiting the circumstances in which the demand can be made could be implied into the contract, and this view was affirmed in Reed Construction Services Pty Ltd v Kheng Seng (Aus) Pty Ltd (1999) 15 BCL 158.
The defendant said that in the present case there was no need to imply into the underlying contract a qualification to the beneficiary's right to make a demand under the Bond. The Bond expressly contained such a qualification and that qualification operated as between the plaintiff and the defendant directly. It stated that the defendant "unconditionally undertakes to pay on demand … any sums … demanded by the Principal to a maximum aggregate sum of $800,000". It goes on to expressly qualify the circumstances in which the demand can be made by using these words: "which demand the Principal may only make following the occurrence of an event of default … ". The Bond then defined an event of default as occurring "if the aggregate of 'Mines Net Income' as defined in the Contract has not reached or exceeded $800,000 by 1 August 1997".
In this latter respect, the defendant argued, the Performance Bond was an unusual one. By its express terms, it incorporated critical aspects of the underlying contract between the beneficiary and the contractor. Accordingly, the plaintiff could not avoid becoming embroiled in issues which arose under the Contract between the plaintiff and Taylor Barnes. This all suggested that, contrary to the cases, relied on by the plaintiff, a bare demand declaring the existence of an event of default was not sufficient. The plaintiff had to establish the actuality of the event of default, and that in turn required that various findings be made by the court as to the proper interpretation of the mining agreement and as to whether the parties to the same had performed their respective obligations.
Against this background, let me now return to the issues to be resolved in the present case.
Sufficiency of bare demand
In regard to this, the principal issue, I must begin by turning to the terms of the Performance Bond. The decided cases, especially Wood Hall (supra) and Fletcher Construction (supra), indicate that in construing the document one is entitled to take account of the commercial purpose of the agreement. In the present case, where the Bond contains explicit references to the mining agreement, this can be done by looking at the express terms of both documents. I am reminded that cl 10.2 of the mining agreement states that "the purpose of the Bond is to guarantee a minimum return of the mine's net income". The terms of the Performance Bond are entirely consistent with this expression of the purpose.
In the circumstances of the present case, where the language used in the relevant documents is said to be ambiguous, as to the meaning of mine's net income and ore, I consider that I am also entitled to take account of the surrounding circumstances.
This issue brings me back to matters of interpretation dealt with earlier. It follows from my conclusion (contrary to the defendant's case) that the inclusive form of the definition of "ore" does not mean that ore is limited to profitable ore and that the plaintiff company did not have a specific obligation to assess the profitability of the material extracted by the contractor prior to making payments under the mining agreement. It also follows that the plaintiff was entitled to set off payments of $503,000 in fact made to the contractor against the sum of $653,690.66 received from the sale of bullion. These were payments made in respect of tonnes of dry ore in the manner allowed for by the mining agreement, albeit that the ore was not being processed and the payments were not being made at the intervals envisaged by the parties at the time they entered into the mining agreement. This finding inevitably means that the notice of demand dated 4 August 1997 was correct in asserting as a matter of actuality (on this view of the matter) that an event of default had occurred in that the aggregate of mine's net income as defined in the contract had not reached or exceeded $800,000 by 1 August 1997. Accordingly, on this basis also, in my view, the plaintiff is entitled to succeed in its claim.
I am conscious, however, that the mining agreement and the Performance Bond, considered in combination, make it clear that any amount claimed against the Bond when aggregated with the mine's net income as at the date of the claim is not to exceed $800,000. This makes it necessary to determine whether the sum of $150,690.66 withheld to meet the contractor's rehabilitation obligations should be characterised as part of the mine's net income. If it were properly characterised as part of the mine's net income, then the plaintiff, in recovering the sum of $800,000 pursuant to its demand under the Performance Bond, would, contrary to the express provisions of that Bond, have recovered an amount exceeding $800,000. There is also the question of whether the value of gold trapped in the system or recovered during the course of Mr Houldsworth's clean‑up should be treated as part of the mine's net income and brought to account with a view to ensuring that the plaintiff did not recover more than the prescribed figure of $800,000.
I digress briefly to note that the quantum issue and related subsidiary issues were not raised directly on the pleadings, but it is probably desirable that findings be made about them.
The cost of rehabilitation is dealt with in cl 4 of Sch 2 of the mining agreement, being a passage set out earlier in this judgment. The clause provides that the first $300,000 due to the contractor shall be withheld as security against rehabilitation costs and which shall be repaid to the contractor either when title to the treatment plant is transferred pursuant to exercise of the option or when the site is rehabilitated in accordance with cl 11.4, in which case the parties agree that receipt by the contractor of the gold and silver in circuit at the treatment plant will be accepted as full payment of the $300,000. At a later stage arrangements were made for the rehabilitation figure to be reduced to $150,000, but otherwise the provisions of the mining agreement continued to apply.
The terms of this clause suggest that the amount in question is notionally to be regarded as income because it is an amount which is "due to the contractor", albeit withheld for the time being as security against rehabilitation costs. Having been characterised as moneys "due" to the contractor, it seems to me that they must be regarded as amounts notionally paid by the plaintiff company to the contractor, as they are clearly amounts standing to the contractor's benefit, and therefore fall within the category of amounts that can be deducted from the proceeds of sale in the manner allowed for by the definition of mine's net income in order to arrive at a determination of what constitutes mine's net income.
Accordingly, in my view, I am satisfied that the plea set out in par 7 of the claim that as at 1 August 1997 the aggregate of mine's net income as defined in the mining agreement was nil because the plaintiff was at liberty to set off against the sum of $653,690.66 received from the sale of bullion amounts paid or due to the contractor, being the sum of $503,000 actually paid in respect of ore and the sum of $150,69066 due to the contractor in respect of rehabilitation.
When one turns to the value of gold in the system or retrieved as part of the clean up, it seems to me that entirely different considerations apply. This was arguably gold won by the contractor during the course of a mining operation and for this reason there is a suggestion that it should be brought to account. I understand that the evidence is, however, that the gold in question was not brought to account for the purpose of determining the mine's net income because the mining agreement had come to an end by the time the value of this gold was realised. There may or may not be a dispute remaining between the liquidators and the contractor as to which party is entitled to the value of this gold, but for present purposes it does not fall within the description of proceeds from sales paid to the specified bank account during the course of the mining operation. Accordingly, I conclude that the value of the gold in question need not be brought to account for present purposes or treated as part of the calculation in determining what was the aggregate of the mine's net income as at 1 August 1997.
Before leaving the second issue, I feel obliged to note in passing that at the trial of the action a considerable amount of time was devoted to the question of whether the plaintiff company by its liquidator Mr Ryan, and his agent Mr Houldsworth, had a basis for asserting that in their reasonable view (to use the language of the definition of ore in the mining agreement) materials were being mined which contained gold or any other mineral in such quantities as to make its extraction profitable. The case for the defendant was that at a very early stage it became apparent to Mr Ryan and Mr Houldsworth, or should have become apparent to them, that the grade of gold being processed was significantly lower than the figure of 3.9 grams per tonne which was the estimated figure of gold retrieval mentioned in the contractor's original proposal.
Thus, the indications were that unprofitable ore was being mined. Mr Ryan should not have made payments to the contractor in those circumstances. My earlier findings make it unnecessary to explore this controversy in detail. However, if I be wrong in the rulings I have made, it is desirable that I make findings in regard to aspects of this controversy.
I am prepared to find that Mr Houldsworth and Mr Ryan did receive regular progress reports from the mining contractor which were open to the interpretation that ore was being processed at grades lower than the grade envisaged by the contractor in its original proposal. In my view, however, this of itself does not establish that the materials being extracted from the mine could not be regarded as profitable in the reasonable view of the company.
The Snowden report, the EMC report and the Olney/MTC report all suggested that there was a considerable degree of variability in the ore. These reports all confirmed that there were still significant reserves of gold bearing ore within the mine and it would obviously depend upon the skill and methods of the mining operator as to whether the gold could be separated from the ore in a profitable manner. Taylor Barnes made representations to the liquidators that it could mine the ore more efficiently than under the previous management and at less expense. In the early stages of the mining operation in December 1996 and January 1997 the contractor represented to the liquidator that there were problems with the mill which would be sorted out in due course. Mr Houldsworth said in evidence that in order to determine the viability of an operation one could not look at a particular day's results in isolation, because of the inevitable variability in the quality of the ore. It was necessary to assess the operation over a period, and even then one had to make some allowance for the potential of the mining operation.
Against this background, I am not prepared to make a finding that during the comparatively short span of the subject mining operation the extraction of materials from the mine could not be regarded as profitable in the reasonable view of the company. The liquidator was not told at any stage that the mining was not profitable and the adverse information coming to him as to low grades and difficulties with the plant was information of a somewhat ambiguous kind which made it difficult to form a clear view that the extraction was not profitable.
The fact that there was no assessment procedure prescribed by the mining agreement which allowed the liquidator to determine the profitability of the mining operation at regular intervals, and the fact that he did not do so, and relied principally upon what he was told by the contractor, simply confirms my earlier conclusion that the mining agreement on a proper construction did not oblige the plaintiff company to assess the profitability of the material being extracted by the contractor. It was the contractor who was principally at risk if the mining operation could not be conducted in an efficient and profitable manner because the contractor would only be paid from receipts arising from the sale of bullion. The plaintiff was protected by the presence of the Performance Bond and the provision that payments were to be made from receipts.
Uncertainty
The defendant has pleaded in par 6 of its defence that the terms of the mining agreement determinative of the calculation of mine's net income are so difficult to decipher or elucidate that no contractual effect can be given to them with the result that the mining agreement is void for uncertainty so as to make the Performance Bond unenforceable.
For a contract to be binding it must be sufficiently certain, that is, it must be both clear and complete, at least in the essentials. Nonetheless, a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the court decides is its proper construction.
The question becomes one of construction, of ascertaining the intention of the parties, and of applying it. So long as the language employed by the parties is not so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention, the contract cannot be held to be void for uncertainty or want of meaning. In looking for the relevant intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements: The Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429.
In the circumstances of the present case, I do not consider that the terms of the mining agreement or the Performance Bond should be characterised as uncertain. It is true that if the various interpretations contended for by the defendant are adopted, then difficulties might seem to arise as to how the mining agreement should have been administered and, in regard to the Performance Bond, as to how the event of default conditioning the demand should be characterised. It follows from my earlier findings, however, that I am not persuaded to the defendant's point of view. I consider that if the relevant agreements are construed in the manner indicated by my earlier rulings, then most of the supposed uncertainties and difficulties disappear. Accordingly, I find against the defendant in regard to this plea.
Discharge of guarantee by material alteration
The defendant relies upon a reference to a guarantee in cl 10.3 of the mining agreement as a basis for arguing that the Performance Bond should properly be characterised as a guarantee. The defendant goes on to say that it is discharged from liability on the grounds that there were material variations to the mining agreement as the principal agreement. The matters relied on are the matters pleaded in par 13, par 14 and par 16 of the defence, namely, that the obligations of Taylor Barnes concerning rehabilitation were varied or, alternatively, the plaintiff's conduct in making payments for material produced by Taylor Barnes, which was then known by the plaintiff not to be profitable, and the contractor's acceptance of such payments, amounted to a material variation which affected the liability of the defendant under the Performance Bond. This entitled the defendant to be discharged from its obligations under the Bond.
One notes immediately that there is no explicit reference in the Performance Bond itself to any guarantee of the contractor's obligation. Further, and in any event, such a reference would not necessarily be conclusive. Likewise, an insertion in par 10.2 of the mining agreement that "the purpose of the Bond is to guarantee a minimum return of the mine's net income" does not establish that the Performance Bond should be regarded as a guarantee.
I find authority for this view of the matter in Wood Hall (supra) where the security documents in question were described as bank guarantees but characterised by the High Court as performance bonds. Barwick CJ noted in the course of his judgment, at 445, that the description "guarantee" was a complete misnomer. The relationship of the bank to the owner or to the contractor had none of the elements of suretyship. The circumstances that the purpose of the cash deposit or its documentary substitute was as a security for the due performance of the contract or the contract work did not, in his opinion, involve either the bank or the owner in any of the obligations or rights of suretyship. The bank documents were in the nature of an unconditional bond to pay money on demand up to a stated amount.
The defendant relied heavily upon the decision of the House of Lords in Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd [1996] AC 199, in which it was held that the bond in question, on its proper construction, amounted to a guarantee. I note, however, that in the Trafalgar House case it was important to the reasoning of the House of Lords that, upon the facts of that case, liability under the bond required more than mere assertion and proof of actual damage was required.
In the present case, I have previously concluded that a bare demand was sufficient in order to obtain payment under the Bond. There are other features of the present case which also suggest, as in Wood Hall, that the defendant could not truly be regarded as acting as a surety. First, the defendant did not purport to underwrite performance of the contractor's obligations generally or to be responsible for loss flowing from breaches of the mining agreement by the contractor in regard to matters such as rehabilitation, mining methods or provision of reports. The defendant's role in the matter was concerned not with performance of the contractor's obligations but with provision of security in regard to one important aspect of the mining agreement, namely, the mine's net income. Second, as I have noted in earlier discussion, the Performance Bond did not purport to incorporate by reference any of the provisions of the mining agreement or to require that a demand be made upon the contractor before the plaintiff company as claimant turned to the defendant as a surety.
Accordingly, I am not prepared to hold that the Performance Bond should be characterised as a guarantee and will rule against the defendant in regard to this aspect of the matter.
Again, however, for the sake of completeness, in case I be wrong in the view I have just expressed, let me briefly address the defendant's position on the assumption that the Performance Bond is characterised as a guarantee.
In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, a surety guaranteed the performance of a hirer under a contract for the hire of machinery. The High Court held that the surety was discharged from liability when clauses requiring the surety to be advised of certain defaults and a proposal to sell or assign the machinery were breached. Deane J said, at 570:
" … in the ordinary case where a surety agrees to be liable for the default of another upon the terms of the contract of suretyship, a significant departure by the creditor from the terms of that contract will, in the absence of agreement to the contrary, operate to preclude the existence or continued existence of the circumstances in which the surety has agreed to be bound. That being so, there is no need for the surety to rescind the contract for repudiation or breach of an essential or fundamental term. In the absence of any question of waiver or estoppel, the situation is simply that the circumstances of his liability as surety do not exist."
My earlier findings preclude the defendant from relying upon such a rule in regard to payments for the ore produced by Taylor Barnes, for I have found that such payments (contrary to the defendant's view) were not untoward or inconsistent with the terms of the mining contract. If, however, as canvassed under the heading "Actuality of Event of Default issue", I be wrong in the view I have expressed, then it must follow, pursuant to the rule enunciated by Deane J, that there has been a significant departure from the circumstances in which the defendant, viewed as a surety, has agreed to be bound. On that view of the matter, the defendant cannot be held liable under the Bond. I am conscious, however, that such a view is somewhat academic because if the defendant's interpretation of the mining agreement and the meaning of "ore" is accepted (contrary to my finding), then the defendant will not be liable under the Bond in any event.
When I apply the reasoning of Deane J to the second of the two matters relied upon by the defendant, namely, that there was a material alteration of the mining agreement concerning the amount withheld for rehabilitation, I am satisfied that a material alteration of this kind would be sufficient to discharge the defendant from liability, if indeed the bond be characterised as a guarantee. By allowing to the contractor a sum of $150,000 which the liquidator would otherwise have been entitled to withhold under the strict terms of the mining agreement, the liquidator could arguably be said to have encouraged the contractor to persevere with a mining operation which proved to be futile. To my mind, this brings the circumstances within the rule enunciated by Deane J, with the result that the renegotiation of the rehabilitation requirement should be characterised as a material alteration sufficient to discharge the defendant, viewed as a surety, from liability.
Formal orders
It follows from the principal finding under the heading "Sufficiency of Bare Demand issue" that there will be judgment for the plaintiff in the sum of $800,000 with provision for interest. The claim concerning interest is contained in par 2 of the prayer for relief and is put in this way:
"Damages for late payment namely interest on the sum of $800,000 compounded at the rate of 10 per cent, alternatively interest thereon at the rate of 8 per cent per annum from 5 August 1997 to date of judgment pursuant to section 32 of the Supreme Court Act 1935."
The Bond does not make specific provision for payment of interest in the event of late payment. Accordingly, in my view, interest should be allowed to the plaintiff pursuant to s 32 of the Supreme Court Act 1935. I will hear from the parties as to the precise orders to be made.
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