Sino Iron Pty Ltd & Ors v Mineralogy Pty Ltd

[2020] HCATrans 10

[2020] HCATrans 010

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P38 of 2019

B e t w e e n -

SINO IRON PTY LTD

First Applicant

KOREAN STEEL PTY LTD

Second Applicant

CITIC LTD

Third Applicant

and

MINERALOGY PTY LTD

Respondent

Application for special leave to appeal

KIEFEL CJ
GAGELER J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 14 FEBRUARY 2020, AT 9.31 AM

Copyright in the High Court of Australia

MR J.T. GLEESON, SC:   May it please the Court, I appear with MR J.H. KIRKWOOD and MS T.N. SPENCER BRUCE, for the applicants.  (instructed by Allens)

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friends, MR T.R. MARCH and MR K.S. BYRNE, for the respondent.  (instructed by Mineralogy Pty Ltd)

KIEFEL CJ:   Yes, Mr Gleeson.

MR GLEESON:   Your Honours, in this application we seek to raise two main related questions about the House of Lords decision in Sudbrook.  The first question is whether that decision is good law in Australia and what precisely does it stand for.  The second question is whether, in any event, the Court of Appeal in Western Australia has extended it into territory where it does not belong – namely, the construction of a pricing formula in a contract which depends upon an external element which, during the life of the contract, ceases to exist due to no fault of either party.

GAGELER J:   When it ceases to exist, you do not say that there was frustration.

MR GLEESON:   We do not. 

GAGELER J:   Where do you go with your construction, Mr Gleeson?

MR GLEESON:   The first step in our argument is that Sudbrook should be put aside.

GAGELER J:   I follow that.

MR GLEESON:   The second step is to say that, on ordinary construction principles, the benchmark price was the integer upon which this clause worked.  So, once the benchmark price ceased to exist in the real world, the pricing clause was incapable of application.  We then say the result was the implied term cut in, which was that a fair and reasonable royalty would be paid.

EDELMAN J:   None of this arises unless you get over the ground ‑ satisfy your ground 2, does it not?  I mean, in a way, although that was the alternative construction in the Court of Appeal, that is really the starting point, is it not?

MR GLEESON:   Your Honour, we need to have strong prospects of success on ground 2.  We have to show that that construction was simply wrong on ordinary construction principles, but we do say that the way the Court of Appeal got to its result placed central reliance upon Sudbrook as the means to reach what we say is erroneous construction.  And we do want to add on that that not only did they rely upon Sudbrook but they relied upon Justice Brennan in Booker and said that represents the law of Australia.

When one reads Booker closely and looks at the order, one will see that Justice Brennan was in fact in partial dissent in Booker because the majority judges would have simply reinstated the primary judge’s declarations and added a further supporting declaration.  Justice Brennan said on the second last page of the judgment he disagreed with those orders, and that was because he went the furthest distance of anyone in the Court in Booker by fully embracing Sudbrook.

The majority, as we would have put it, did not go beyond the very conventional part of Sudbrook, which is that if the contract has a machinery which depends on, for example, the appointment of a valuer, and a party in breach fails to appoint their valuer, of course the court can order the party to perform the obligation and appoint the valuer.

That is the ground 1 aspect ‑ that Sudbrook needs to be recognised as not standing for the approach the Court of Appeal took.  Once that is done we then need to win on ground 2 on the construction argument, and what has happened there is a little peculiar in the Court of Appeal.  The Court of Appeal correctly said those words mean the benchmark price, and to that extent we succeeded on appeal, because at first instance the trial judge did not take that step.  And the Court of Appeal said correctly, it must mean a benchmark price, because what it says is prevailing published annual FOB price, and at ‑ ‑ ‑

GAGELER J:   It depends what you mean by “mean”.  It must encompass, it must designate at the time.  The denotation at the time was that.

MR GLEESON:   Yes.  Well, at the time there were two broad pricing mechanisms in the market, there was a spot price and there was a benchmark.  In the benchmark, you have the findings on how that was set, after the first contract was concluded between a supplier and a big purchaser, that became published, and that was the price fixed for the whole year.

Now, the Court of Appeal, we say, correctly said that, from those words, prevailing published annual FOB price, by reference to what existed in the market at the date of the contract, that meant “benchmark”.  The step that we challenge on ground 2 is that the court said we can actually discern something broader from the clause, which is the real promise, is a promise to pay what they called an “export market price”.  And the court then said, well, if it is an export market price, the benchmark is merely a subsidiary means to get into an export market price.  That is the point that we have to challenge on ground 2.

EDELMAN J:   In a way that is really the starting point though, is it not?  Because if one takes that broader, more flexible construction, which would encompass benchmarks but not be confined to benchmarks, particularly in the context of a long‑term contract, then all this appeal would be about would be the construction of a few words in a bespoke contract.

MR GLEESON:   Your Honour, I am agreeing it is important, it is central to the proposed appeal, but what I am seeking to submit is that the critical means by which the Court of Appeal went to the broader approach was to say, we are following Sudbrook and we are following Justice Brennan in Booker.

Now if that had not been the prism through which they had entered it, one would simply have come back and said, when you are looking at those words and you know that at the date of the contract there are those two pricing mechanisms in the market and no others, what you would discern from that is the party’s intent was a very specific one.  It was to say price is a very important part of this contract, we want absolute certainty, we want the benchmark; that is our agreement.

KIEFEL CJ:   If you are correct about the Court of Appeal’s construction, you would then say that when the mechanism fails there is necessarily an implied term, and, as I understand it, the term you would say which has to be implied is one whereby the parties are required to negotiate in good faith towards another outcome, rather than the mechanism being supplied by the court. 

MR GLEESON:   Yes.  The court does not supply the mechanism in our argument.  What happens is the implied term is a fair and reasonable royalty, and the way that is done is – as your Honour put to me – that the party on one side would propose the fair and reasonable royalty with particulars.  The party on the other side would respond, if there is a dispute, and the Court of Appeal accepted this obiter.

That would go to the expert under clause 8.6 of the contract, and that would provide the answer to it.  So the fundamental difference is rather large between the results.  What has happened on the Court of Appeal’s approach is, having abstracted up to this export market price, it has then come down and said we, in effect, substitute the machinery, which is Mr Brierley’s approach.  Whereas on our approach it is the implied term, and it is then dealt with in the manner I have raised with your Honour.

And so, we would submit the Sudbrook question is an important one in principle.  It is important to observe that Justice Brennan is, in fact, in dissent in that case.  When one applies conventional construction, one would take the approach I have indicated, and then the implied term provides the solution.

EDELMAN J:   Why does one need the Sudbrook prism for that broader approach?  Why cannot one say, for example, as the Court of Appeal said at various points, that it is a long‑term contract, there is flexibility, one reads the words in that context, there is a literal, possibly a narrow literal meaning that could be given to them, or a broader meaning that is capable of more denotations?

MR GLEESON:   For the purposes of your Honour’s question I will put Sudbrook to the side and then try and address it.  The parties chose some very precise words in order that they have certainty.  If you do not see a single word of “export market price” in this clause, so that construction is not pay a fair and reasonable royalty, that is a quote “export market price”.  It is most unlikely that the parties would have exposed themselves to a term that is effectively open‑ended, it does not even have “fair and reasonable” as its qualifier, it is an “export market price”, and the moment you ask what does that mean, at the date of the contract it is almost impossible to say it.  And that is the problem which ‑ it can be seen by Mr Brierley’s method, which has been now said to be the export market price, that is the Court’s substitute mechanism.

Mr Brierley has chosen one of a range of possible price indexes which are no more than someone’s opinion of prices that might be being achieved in the market, in the spot market in large part, and then from that he has attempted to average a larger price, and then he has made a whole series of calculations for freight and the like, which are contestable on various grounds.  But the notion that the parties would have opened themselves up to the indefiniteness of the so‑called export market price, nowhere in the contract, we would submit, is – it would be a very, very surprising one.  Your Honours, that is the essence of the application, if it pleases the Court.

KIEFEL CJ:   Yes, thank you Mr Gleeson.  Yes, Mr Jackson?

MR JACKSON:   Your Honours, may I say first that, in our submission, there is nothing special in the case meriting the grant of special leave, that it is an example of the exercise of the application of the language of a contract, to circumstances as they might arise, from time to time in it.  Could I just say this, your Honours, there was no dispute in the Court of Appeal before, as to the correct principles of construction.  Your Honours will see that referred to at paragraph 295 at page 359.

GAGELER J:   Who opened up this Sudbrook point?  Was that your side?

MR JACKSON:   Your Honour, could I just say in relation to Sudbrook that the reference one sees to Sudbrook in the submissions before the Court is simply the reference that we have referred to in our response, your Honour, at ‑ your Honour, I am sorry to be taking ‑ ‑ ‑

GAGELER J:   It might be paragraph 24.

MR JACKSON:   Yes, it is, your Honour.  The preceding word of our thing says “essential”.  I think it should be “inessential”.  But, that is all that is said.  The issue was not one of particular consequence.  Your Honour, could we just say that there was no dispute as to the principles of construction.  You will see that in paragraphs 295 and 297 below.  As is made clear by the terms of the royalty agreement, page 283, Royalty B is enduring; is payable throughout the term of the agreement; is payable quarterly; is based on quantity and is based on quantities taken in the previous quarter.

The Court of Appeal and the primary judge have each rejected what are the core contentions underlying the applicant’s case.  Your Honours, could we just say this, that if one looks at the provision of the terms of the primary judge’s reasons, he treated the words as including a reference to “benchmark pricing”, as it existed at the time of making the contracts.  In the Court of Appeal one does not quite see that the Court of Appeal says that the words used in the formula meant, and only meant, the benchmark price.

Could I give your Honours the references in that regard because you will see that on each occasion the qualifying words “in effect” there used?  The first one, your Honours, is page 343, paragraph 260.  Your Honours will see in paragraph 260, referring to some of the arguments, the Court says in the first three lines:

predicated on acceptance of the . . . contention . . . that the reference (in effect) . . . to benchmark prices is exclusive and exhaustive.

Then you will see when the matter comes to be decided, at page 373 – your Honours will see, at paragraph 327:

The next issue is whether the reference (in effect) within the overall composite expression . . . is an essential term of the Agreement.  

Then, your Honours, the summary of views, at paragraph 331, page 374, where it said – and this is in the prefatory part of the summary of views:

In our view, the reference (in effect) to benchmark prices . . . is not an essential term.

EDELMAN J:   You say they are talking about “application” rather than “core meaning”.

MR JACKSON:   Yes, your Honour, yes.  You will see, your Honours, also, at page 375, the next page, about the last six or seven lines:

The parties have prima facie used the word ‘prevailing’ . . . in order to pick up both increases . . . and decreases –

and so on.  Your Honours, one sees throughout the remainder of the reasons that what is being said, in effect, is that you have a reference which was perfectly apposite at the time to pick up the system that was prevailing at the time of the contract and have a short shelf life, as it were, thereafter but it was not.  The view that was the exclusive approach simply was not accepted.

GAGELER J:   What does this reference to “non‑essential mechanism” used to identify the “export market price” add to the reasoning?

MR JACKSON:   It needs to be read, I think, your Honour, in the light of the basic approach which was taken by the Court of Appeal where it summarised the views or the approach to be taken.  That can be seen, your Honours, in the principles that were being applied.  Your Honours can see at page 334, at paragraphs 233 to 235, that there they speak – and your Honours will see in those three paragraphs a “non‑essential term”, and the question is what was or was not – whether these provisions were or were not essential or non‑essential in that sense.  When I say “in that sense”, your Honour, were they provisions which were – the operation of which was a condition of the continued operation and effect of the contract?  That, your Honours will see, from paragraph 234, I think.

Could I in that regard turn to what was said about Sudbrook.  Your Honours, in our submission, there are some difficulties in the applicant’s path in the submission that the Court of Appeal was in error in saying that the approach in Sudbrook had been accepted in Australia.  The first thing is that the actual principle being applied by the Court of Appeal is that which is set out in those paragraphs to which I have just referred.  And the contribution of Sudbrook, your Honours, is just to the same effect.  You will see that in paragraph 237 in the last few lines of that paragraph.

Could I just say that the notion that that part of Sudbrook was new law in Australia.  We would submit it would have surprised the three members of this Court in Axelsen v O’Brien (1949) 80 CLR 219. It was referred to by the Court of Appeal in footnote 306 at page 334. One sees the members of the Court in that case using language similar to that used in Sudbrook. 

Could I refer to Sir Owen Dixon at page 226.  He sets out in the first paragraph the first of the objections made, which was that a bill of mortgage and a nomination of trustees had to be prepared.  And his Honour said at the fifth line:

The answer is simply that these matters are left for the decision of solicitors –

et cetera.  Your Honours will see the words:

and do not form an essential part of the contract but are the means to carry the sale into effect.

A little further down:

The court may settle the terms if it grants specific performance.

And then, your Honours, further down the same page, at the next paragraph, where he refers to the second objection, and he goes on to say, halfway through the paragraph:

The cases cited in support of this argument show that courts of equity will not order conditional contracts to be carried out.  But there are cases which show that that view is not applicable to conditions which are the subsidiary means ‑

and so on.  And your Honours to the ‑ ‑ ‑ 

EDELMAN J:   There is a distinction between I think what might be described as the essential terms or essential meaning and means of carrying out or application. 

MR JACKSON   Well, your Honour, no doubt that is a distinction which can be drawn; it is appropriate in some cases.  Its application, of course, will vary from case to case.  I was going to refer also, if I may your Honours, very briefly, in that same case, to what was said by Justice Rich at page 225.  You will see the word “subsidiary” used, and you will see also Chief Justice Latham’s discussion of the matter at pages 224 through to the end of his reasons.  The point that I am seeking to make about it, your Honours, is simply this – what was said, or what is said to have been applied in the present case and Sudbrook is nothing really very new.

Your Honours, the second point in relation to Sudbrook is that if one looks at page 336 of the book, paragraph 238, what one will see is that what was said:

The approach adopted by Brennan J in Booker and by the House of Lords in Sudbrook referred to above –

Your Honours, what one sees in that regard is that the approach taken by Justice Brennan is actually that quoted at paragraph 236 on the preceding page, and your Honours will see the italicised parts of that quotation.  There they emphasise the fact that the party has gone “into possession”, it has the benefit of it.  And, your Honours, that is hardly a novel or exotic approach to construction.  And it seems entirely consistent with the principles at 295 and 296. 

Your Honours, fourthly, it is contended that Justice Brennan in Booker, expressly left open the question of whether Sudbrook represented the law in Australia.  But if one looks at Sudbrook at page 616 at about point 4 on the page, it can be seen that it is really referring to a situation in the decision of this Court in Hall v Busst, the decision pertaining to contracts for the sale of land, which may stand on a different footing from those of other contracts.  Your Honours, the ‑ ‑ ‑ 

KIEFEL CJ:   Mr Jackson, the Court of Appeal, after describing the mechanism as non‑essential and approaching the matter in that way, did so by reference in the first place to a matter of pure construction, but set up an alternative as well, did it not?

MR JACKSON   It did, your Honour, yes. 

KIEFEL CJ:   The implication of a term, according to the BP Refinery test.  Do you say that both approaches are correct?

MR JACKSON:   Well, the answer, your Honours, is yes.  But we would say that each of them reflects an appropriate approach to interpretation ‑ is a reflection of an approach to interpretation.  Your Honours, could I just say this, the preferable view is that, as a matter of interpretation, the approach taken by the Court of Appeal on the first basis, that is, by looking at the words of the contract, is the better way of dealing with it.

GAGELER J:   Sudbrook really does not add anything but confusion to that, does it?

MR JACKSON:   Well, your Honour, it depends what part of Sudbrook one looks at, really, and the ‑ ‑ ‑

EDELMAN J:   If one reads Sudbrook as just being a case which is talking about essential meaning and then, in the real world, there are different ways of applying the way in which ‑ the meaning in which a contract sets up, then it is not saying anything at all radical.  If one reads it in other ways, then it may introduce some confusion.

MR JACKSON:   That is possible, your Honour, but all that one has in the present case is that the actual approach taken by the Court of Appeal and the approach taken, indeed, by the primary judge, were approaches which, prima facie, looked at the words used in a contract which was to be for the supply of iron ore over a particular period and provided for a basis for ‑ provided a basis, independent of the parties, for determining how much should be paid.

Your Honours, could we say just this, your Honours.  One sees that the argument of the appellant does not really seek to challenge ‑ I am sorry, I will start again.  One sees that the difference between the result arrived at by the primary judge and the result arrived at by the Court of Appeal, whatever be the exact process of reasoning, there was no difference between them except that, on the primary judge’s approach, it had to be done annually, by reference to an annual calculation back from the last date of the quarter, or on the Court of Appeal’s approach, by a quarterly approach.  Now, of course, it could go either way, and depends on a number of factors, one way or the other.

Your Honours, could I just go then to the question of the implied term.  Your Honours, one sees that the contention adopted by our learned friends is that the Court of Appeal somehow went wrong with the applied term.  One was in relation to the time at which it should consider the matter; your Honours, I could go into detail about that but I shall not, of course.  But when one comes to the implied term, unless there is success on the first point by our learned friends, then the implied term agreement issue just does not arise.  Your Honours, those are our submissions.

KIEFEL CJ:   Yes.  Anything in reply, Mr Gleeson?

MR GLEESON:   Yes, your Honour.  The answer to Justice Gageler’s question was, I am told, Sudbrook was not a matter of debate in the Court of Appeal, it emerged in the reasons of the Court.

GAGELER J:   I see.

MR GLEESON:   We strongly dispute Mr Jackson’s submission that Sudbrook can be treated as incidental in respect to the reasoning of the Court in this case.  When one looks at the key passage, if I could take you to it, on page 376 in paragraph 4, and this is the key conclusion, the footnotes 464 and 465 are to Sudbrook, and then there is a reference back to Justice Brennan in Booker at paragraph 236 that you have been taken to, so it is central to the reasoning.  In respect to Mr Jackson saying that ‑ ‑ ‑

KIEFEL CJ:   Do you say that the Court of Appeal, by that approach, are regarding Sudbrook as an aid to construction?

MR GLEESON:   Yes, yes, and they are saying ‑ and this is why, in answer to your Honour Justice Edelman, this is not just another version of application of a sensible principle.  In a case like the Axelsen decision that Mr Jackson took you to, that was a case where the Court was able to say that the primary contract is for sale.  There is then a mortgage transaction, which is a vendor finance transaction; it is subsidiary to the primary contract.

If for some reason some difficulty arose in the working out of the secondary transaction, which had not arisen on the facts, the Court of Equity would not allow that difficulty to undermine the enforcement of the primary transaction; perfectly acceptable.  Where Sudbrook has gone a step further is that Sudbrook has said, if something has gone wrong, the Court can substitute its own machinery, and if I could ask your Honours ‑ ‑ ‑

EDELMAN J:   Obviously only if the something that has gone wrong is, quote “non‑essential” close quote, and by “non‑essential” it means that it is not something that the contract envisages must be complied with.

MR GLEESON:   And it applies in a context where one is able to separate two matters out, and say, well in Sudbrook, the primary matter is the obligation to pay a fair and reasonable price.  Now, whether that was a proper construction, that is in issue, but if that is the primary matter, then a mere failure at the stage of appointment of value should not be allowed to undermine the primary matter.  What is really, we would say, radical and significant about this decision is that, if you could go back to one of the key passages, which is on page 373 at paragraph 327 ‑ and your Honour Justice Gageler asked about this ‑ how do you, within a single contractual term, a pricing formula, say that some words are essential and others are non‑essential?

EDELMAN J:   That is why they must be talking about an essential or non‑essential meaning, and the non‑essential meaning being the “in effect” or the application of the term.

MR GLEESON:   Yes.  I notice the light is on, your Honour.

KIEFEL CJ:   If you wish to answer Justice Edelman.

MR GLEESON:   Yes.  Thank you, your Honour.  Your Honour says they must be.  There is grave doubt as to whether that is what the court is doing.  It seems to have said Sudbrook and Justice Brennan authorise us to do this, and it has got this export market price from nowhere, divorced from any construction of the contract, and then within that clause it is saying some bits stay and some bits go.  May it please the Court.

KIEFEL CJ:   Yes, thank you.

The Court is of the view that there are insufficient prospects of success to warrant the grant of special leave.  Special leave is refused with costs.

MR GLEESON:   May it please the Court.

KIEFEL CJ:   The Court will adjourn to reconstitute.

AT 10.05 AM THE MATTER WAS CONCLUDED