Bathurst Resources Ltd v L & M Coal Holdings Ltd
[2021] NZSC 85
•14 July 2021
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| IN THE SUPREME COURT OF NEW ZEALAND I TE KŌTI MANA NUI |
| SC 29/2020 [2021] NZSC 85 |
| BETWEEN | BATHURST RESOURCES LIMITED |
| AND | L & M COAL HOLDINGS LIMITED |
| Hearing: | 8 and 9 October 2020 |
Court: | Winkelmann CJ, Glazebrook, O’Regan, Ellen France and Williams JJ |
Counsel: | J E Hodder QC, R J Gordon and D P MacKenzie for Appellants |
Judgment: | 14 July 2021 |
JUDGMENT OF THE COURT
AThe appeal is allowed. The judgments of the High Court and Court of Appeal are set aside and judgment is entered for the appellants.
BThe application to adduce further evidence is dismissed.
CThe respondent must pay the appellants costs of $30,000 plus usual disbursements. We certify for second counsel.
D Costs should be re-determined in the Courts below in light of this judgment.
____________________________________________________________________
SUMMARY OF RESULT
(Given by the Court)
This appeal concerns the proper interpretation of a contract for the sale of coal mining rights. How to interpret the words of a written contract is a perennial issue in the law, and while over time the test to be applied to find the meaning of those words has become settled, the issue of what evidence outside the words of the contract should be allowed to assist with this task continues to be debated. So too the nature of the test for implication of terms in a contract.
All members of the Court have agreed on the approach to the admissibility of extrinsic evidence in cases of contractual interpretation.[1] The Court has also agreed on the test for the implication of terms.[2]
[1]At [54]–[90] per Winkelmann CJ and Ellen France J and [232](a) per Glazebrook, O’Regan and Williams JJ.
[2]At [106]–[117] per Winkelmann CJ and Ellen France J and [232](b) per Glazebrook, O’Regan and Williams JJ.
The Court is unanimous on the interpretation of cl 3.4 of the contract between the parties.[3] Members of the Court have taken different views on the construction of cl 3.10 of the contract. The majority have found in favour of the appellants on this point, which is dispositive.[4] Accordingly, the appeal is allowed. The respondent must pay the appellants costs of $30,000 plus usual disbursements. Costs in the Courts below should be re-determined in light of this judgment. Winkelmann CJ and Ellen France J would have dismissed the appeal.[5]
[3]At [134]–[158] per Winkelmann CJ and Ellen France J and [232](c) per Glazebrook, O’Regan and Williams JJ.
[4]At [281] per Glazebrook, O’Regan and Williams JJ.
[5]At [223].
The reasons of the Court for this result are given in the separate opinions delivered by:
| Para No. | |
| Winkelmann CJ and Ellen France J | [5] |
| Glazebrook, O’Regan and Williams JJ | [232] |
REASONS
WINKELMANN CJ AND ELLEN FRANCE J
Table of Contents
| Introduction | [5] |
| Factual background | [11] |
| Summary of the parties’ submissions | [31] |
| Evidence available to assist in contractual interpretation | [40] |
| Parties’ submissions on the admissibility of extrinsic evidence | [50] |
| The approach to admissibility in New Zealand | [54] |
| Declarations of subjective intent | [67] |
| Prior negotiations | [69] |
| Specialised meanings | [81] |
| Subsequent conduct | [84] |
| Test for implication of terms: the same as interpretation? | [91] |
| Parties’ submissions | [103] |
| Our approach to the test for implication of terms | [106] |
| Was the first performance payment under cl 3.4 triggered? | [119] |
| Parties’ submissions | [121] |
| Bathurst | [121] |
| L&M | [129] |
| High Court decision | [131] |
| Court of Appeal decision | [132] |
| Our analysis | [134] |
| The text of the contract | [134] |
| Commercial purpose | [139] |
| Subsequent conduct | [149] |
| Evidence as to the meaning of the word “shipped” | [152] |
| Conclusion | [158] |
| The construction of cl 3.10 | [159] |
| The relevant provisions | [165] |
| The approach in the Courts below | [167] |
| Overview of submissions | [170] |
| Our assessment | [174] |
| Discussion | [175] |
| An implied term? | [201] |
| Proper purposes | [224] |
| Good faith | [227] |
| Result | [230] |
Introduction
The dispute between the parties to this appeal arises in the context of the sale of coal exploration permits over parts of the Denniston and Stockton Plateaus. These plateaus lie within the Buller Coalfield, which is an historic mining area in the South Island of New Zealand.
In June 2010, Bathurst Resources Ltd (Bathurst) agreed to purchase coal exploration rights and mining-related applications from L & M Coal Holdings Ltd (L&M). Two performance payments, each of USD 40 million, were agreed to be payable when 25,000 tonnes, and then one million tonnes, of coal had been “shipped from the Permit Areas”. Then, in 2012, Bathurst and L&M entered into a deed (the Third Deed) varying the original written Agreement for Sale and Purchase (the Agreement) to provide that payment of the first performance payment could be deferred at Bathurst’s election while Bathurst continued to pay royalties under a related royalty deed.
After more than 25,000 tonnes of coal was mined and trucked out, Bathurst suspended mining and stopped paying royalties, apart from royalties on a small amount of stockpiled coal. It has yet to pay the first performance payment. Bathurst says that without mining, no royalties are due and so, since it is continuing to pay the royalties due under the royalty deed (which are none), it can continue to defer payment of the first performance payment.
Bathurst and L&M dispute the proper interpretation of the Agreement and the amending Third Deed. There are two core issues between them. The first is as to whether the first performance payment obligation has been triggered in terms of the Agreement, an issue which turns on the interpretation of the expression “shipped from the Permit Areas” in cl 3.4 of the Agreement. The second issue is whether, if the first performance payment obligation has been triggered, Bathurst is contractually entitled to continue to defer that payment when it is not paying any royalties.
In the High Court, in order to support their respective cases for a particular interpretation, the parties produced extensive evidence which was extrinsic to the written contractual documents. This included evidence of pre-contractual negotiations; of what the parties intended the agreements should mean; of surrounding circumstances, both before and after execution of the two documents, which are said to show the commercial purpose of the agreements; and evidence of the parties’ post‑execution conduct. The High Court[6] and Court of Appeal[7] each found in favour of L&M on the substantive issues, holding that the obligation to make the first performance payment had been triggered and could not be deferred when no royalties were being paid. However, they differed to some extent in their approach to the admissibility of the extrinsic evidence adduced by the parties.
[6]L&M Coal Holdings Ltd v Bathurst Resources Ltd [2018] NZHC 2127 (Dobson J) [HC judgment].
[7]Bathurst Resources Ltd v L&M Coal Holdings Ltd [2020] NZCA 113 (Kós P, Gilbert and Goddard JJ) [CA judgment].
The test for the admissibility of extrinsic evidence to assist with the task of contractual interpretation and for the implication of contractual terms are issues of general or public importance.[8] Leave was therefore granted to Bathurst to appeal to this Court. The grant of leave included the following indications to counsel to assist in their preparation for the appeal:[9]
(a)The Court would not revisit the principles of contractual interpretation that were set out by this Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd.[10]
(b)However, since Firm PI did not address the approach to be taken to the admissibility or otherwise of evidence of prior negotiations or subsequent conduct,[11] we would hear argument on these issues.
(c)We would hear argument on the distinction between interpretation and implication and the appropriate test for the latter.
Factual background
[8]Senior Courts Act 2016, s 74(2)(a).
[9]Bathurst Resources Ltd v L&M Coal Holdings Ltd [2020] NZSC 73 [Leave judgment].
[11]On subsequent conduct, counsel were also asked to address the comments of Thomas J in Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277 at [113].
Prior to 2010, L&M was the holder of two exploration permits on the Denniston and Stockton Plateaus.[12] An area known as Escarpment, on the Denniston Plateau, was seen as the most attractive development project for coal extraction. That was because it contained significant volumes of high quality coking coal. The characteristics of coking coal are such that it can be used in the steel-making process. It is of higher value than thermal coal. Thermal coal is degraded coking coal which has lost its coking properties through the process of oxidisation. Thermal coal was also present at Escarpment, a natural by-product of the presence of coking coal.
[12]L&M held these permits through its subsidiary, L&M Coal Ltd.
By 2008, L&M was seeking to either develop this coal resource with a partner, or to sell the development prospects to others. In 2009, Mr Geoff Loudon, a director of L&M’s parent company, met with Mr Hamish Bohannan, then Chief Executive of Bathurst. Bathurst already had mining interests in the state of Kentucky in the United States and was seeking opportunities elsewhere. The parties discussed the potential sale, and in December 2009 Bathurst made a formal offer, with a conditional consideration of USD 110 million. In February 2010, a binding letter of intent was signed, and on 10 June 2010 the Agreement was executed.[13]
[13]The original Bathurst party to the Agreement was at the time called Bathurst Resources Limited. Although that is the same name as the first appellant, it is not the same legal entity. The original Bathurst contracting party has been renamed BR Coal Pty Ltd and is now a non‑active company, following a reorganisation by way of a scheme of arrangement whereby all of the shares in BR Coal were transferred to the first appellant. On 7 June 2013, a deed of novation was entered into in recognition of the reorganisation, which had the effect that BR Coal’s obligations under the Agreement were novated and assigned to the first appellant. None of the issues turn upon the identity of the original contracting party and the novation. We therefore use the name Bathurst Resources Ltd, and the abbreviation Bathurst, without differentiating between the original contracting party and the novated party.
The transaction was structured as a sale of all the shares in the company which held the assets – Buller Coal Ltd.[14] The assets included two exploration permits and the rights associated with them, and an outstanding application for a mining permit for Escarpment, which fell within the area of one of the exploration permits.[15] The mining permit for Escarpment was granted shortly after the Agreement was entered into, on 24 June 2010.
[14]At the time of the Agreement, Buller Coal Ltd’s name was L&M Coal Ltd. It changed its name to Buller Coal Holdings Ltd on 9 November 2010 and then to Buller Coal Ltd on 28 February 2011. To avoid confusion, we refer to it as Buller Coal throughout.
[15]The exploration permits were EP 40628 and EP 51708. The mining permit for Escarpment was MP 51279. The assets transferred on sale also included access agreements, resource consent applications and other records and information.
The payment for these rights included cash consideration, performance payments, performance shares and royalties payable under a royalty deed, the draft of which was attached as a schedule to the Agreement.[16] The Agreement provided for the payment of USD 120 million in instalments as follows:
(a)A deposit of USD 5 million.
(b)A further USD 35 million (the “Settlement Cash Consideration” as defined in the Agreement) payable upon settlement.
(c)Two performance payments – USD 40 million within 30 days of the date on which the first 25,000 tonnes of coal had been “shipped” from the permit areas, and another USD 40 million within 30 days of the date on which the first one million tonnes of coal had been “shipped” from the permit areas.
[16]The Agreement also required Bathurst to complete a guarantee and security deed, again attached as a schedule to the Agreement, by which Buller Coal would guarantee Bathurst’s performance and provide a first ranking security over all of the assets to secure payment of all amounts payable. The Agreement and the related deeds imposed obligations on both Bathurst and Buller Coal. For ease of comprehension, we refer to the rights, obligations and conduct of both parties as Bathurst’s rights, obligations and conduct. For the purposes of this judgment, it is not necessary to differentiate.
As noted, part of the price paid by Bathurst for the assets was the ongoing obligation to make royalty payments. The primary parties to the royalty deed were L&M and Buller Coal. The royalty deed provided that royalties on all coal sales were initially to be paid at a rate of 10 per cent of gross sales revenues, dropping to five per cent after the payment of the first performance payment, and then to 1.75 per cent after the payment of the second performance payment. The deed clarified that the obligation to pay royalties ran until the End Date, defined as the later to occur of the end of the term of both exploration permits (and any mining permit issued from them), or the final cessation of mining operations in the permit areas. There was also clarification that royalties would be payable at a rate of 10 per cent until the End Date in the event the first performance payment was not made.
Beyond the payment of royalties, the royalty deed imposed obligations upon Bathurst relating to its exploitation of the permits as follows:
8.1 Throughout the currency of this Deed, [Bathurst] shall:
(a)satisfy the minimum work programme in respect of … each of the Permits;
(b)conduct mining operations in accordance with good mining practice and with a view to maximisation of Coal sales at the best available price;
(c) otherwise keep each of the Permits in good standing; and
(d)notify [L&M] of the grant of any mining permit within the Permit Areas, within 5 days of receiving notification.
The final part of the agreed price for the mining rights was the issue of performance shares. Bathurst agreed to issue to L&M, or its nominee, fully paid ordinary shares amounting to five per cent of the post-issue share capital of Bathurst. The obligation to issue the performance shares was triggered on the first to occur of two events: the second performance payment falling due or Bathurst receiving notice of an offer from a third party to acquire more than 50 per cent of its shares. If Bathurst failed to issue these shares when the obligation was triggered, then in lieu of the issue of shares, the royalty rate in terms of the royalty deed would increase by two per cent.
Clause 9 of the Agreement detailed procedures and rights on default. Clause 9.3 provided that if the defaulting party did not comply with the terms of the settlement notice, the non-defaulting party could:
(a) sue the defaulting Party for specific performance; and/or
(b) cancel this Agreement; and/or
(c) sue the defaulting Party for damages.
Clause 9.7 provided that these same rights were available in the event of non-payment of performance payments, aside from the right to cancel.
The Agreement contained an “Entire Agreement” clause stipulating that the written agreement constituted the entire agreement between the parties on the transfer of the assets and that it superseded and extinguished all earlier negotiations, understandings and agreements, oral or written, between the parties.
The Agreement was subject to a number of conditions, including finance conditions and the completion of a Definitive Feasibility Study (DFS) on the Escarpment Mine to the “reasonable satisfaction” of Bathurst. The content of this study was relied upon by Bathurst as material to the issues of interpretation, although it is a document which was completed after the Agreement was executed.
The Agreement became unconditional and settled in November 2010, with the payment of the Settlement Cash Consideration of USD 35 million. Bathurst needed to raise substantial amounts of capital to meet its payment obligations under the Agreement. Although there was initial success with that capital raising,[17] the project was then subject to substantial delay. The Escarpment Mine took longer to develop than had been projected because of difficulties in obtaining resource consents.
[17]Bathurst raised approximately AUD 165 million through two equity raising rounds in the 2010/2011 financial year.
During this period of delay, the international price of coking coal collapsed. The price had peaked in mid-2011 at around USD 330 per tonne. By 2016, it had fallen to what was to be the low point of USD 80 per tonne.
The parties enjoyed a constructive and cooperative relationship as Bathurst worked towards being able to exploit the rights it had purchased. In particular, L&M was flexible in its approach to enforcing its contractual rights in order to help Bathurst get the project up and running. The parties entered into the Third Deed of Amendment to the Agreement in August 2012. Although, as the name of the document suggests, this was the third amendment, the earlier two are not significant to the issues on appeal.
The Third Deed addressed whether Bathurst would be in breach of contract if it failed to pay the first performance payment when due but continued to pay royalties at the initial level. It is a very short document. It is common ground that there are errors in its expression which add difficulty to the task of its interpretation. We highlight three aspects of the Third Deed as bearing upon its interpretation:
(a)The purpose of the Third Deed is stated in the background recitals as: “This Deed records the parties’ agreement to clarify a matter in relation to the Performance Payments under the Agreement.”
(b)Clause 2, the critical operative provision, appears under the heading “Amendment to Agreement”. It records that the Agreement is amended by the Third Deed by adding a new clause, cl 3.10, as follows:[18]
Failure to make Performance Payments
For the avoidance of doubt, the parties acknowledge and agree that a failure by [Bathurst] to make, when and as due, a Performance Payment is not an actionable breach of or default under this Agreement for so long as the relevant royalty payments continue to be made under the Royalty Deed.
(c)Finally, cl 3 records:[19]
NO WAIVER
For the avoidance of doubt, nothing in this Deed constitutes a waiver by [L&M] of any of its rights as referred to in clause 9.7 of the Agreement, so long as payments are made in accordance with the Royalty Deed.
[18]The Third Deed purported to insert a new cl 3.9, although the draftsperson seems to have overlooked the fact that the first amendment had already inserted a new cl 3.9. So although the clause is numbered cl 3.9 in the Third Deed, it has been treated by all parties as cl 3.10.
[19]The provision mistakenly refers to the rights of the “Purchaser” rather than the “Vendor”: see below at n 175.
It was not until November 2013 that Bathurst obtained the resource consents it needed for Escarpment, and even then work on the mine could still not commence because of delays in obtaining the necessary access rights. Throughout this period of delay, coking coal prices continued to drop.
In February 2014, Bathurst announced to the market that it would be deferring “ramping up” production at Escarpment, indicating there would be only limited mining of coking coal.[20] Bathurst provided as part of the reason for this decision that it expected operating costs at Escarpment to range from about USD 120 per tonne on start-up, dropping to less than USD 90 per tonne once production ramped up to about one million tonnes per annum. At the time of the announcement, the international spot price for coking coal was around USD 120 per tonne.
[20]Bathurst announced that it would only mine “sufficient coal to complete market qualification for coking coal supply to steel producers, principally in Japan and India”.
The required resource and access consents were in place by June 2014.[21] The first coal was recovered from Escarpment in September 2014. The coal extracted and sold by Bathurst was non-coking coal and was sold domestically to the Holcim (New Zealand) Ltd (Holcim) cement works near Westport. By September 2015, 25,000 tonnes had been extracted and moved off the permit areas. That was the quantity stipulated in cl 3.4 of the Agreement as triggering the first performance payment obligation. However, the USD 40 million was not paid. Through the rest of 2015 and early 2016, Bathurst continued to mine Escarpment and to pay royalty payments on the coal that was sold, which, in terms of cl 3.10, meant Bathurst could delay paying the USD 40 million payment.
[21]The necessary authority to enter and operate Escarpment was obtained in June 2014.
By early 2016, the price for coking coal had reached a low of USD 80 per tonne. Holcim had also confirmed that it would be closing its Westport factory.
In March 2016, Bathurst announced that from May 2016 it would suspend mining operations at Escarpment. It has not mined Escarpment since then. Bathurst had also acquired permits at West Whareatea and Coalbrookdale in 2011, both adjacent to Escarpment, as part of its wider “Buller Project”. In 2017, it acquired the Sullivan Coal Mining Licence, also adjacent to Escarpment. Further, Bathurst formed a joint venture with Talley’s Group Ltd, and in August 2017 that joint venture company, BT Mining, acquired former mining assets of Solid Energy New Zealand Ltd on the Buller Coalfield. Bathurst has since been mining those assets.
As a consequence, the constructive relationship that previously existed between the parties has broken down, with each party expressing very different views as to the meaning of the Agreement.
Summary of the parties’ submissions
As noted above, the first issue between the parties is whether the first performance payment obligation has been triggered. This issue concerns the meaning of the expression “shipped from the Permit Areas”, which appears in cl 3.4 of the Agreement. It is L&M’s case that the obligation to make the first performance payment was triggered by Bathurst’s extraction and shipment off-site of 25,000 tonnes of non-coking coal, which it sold into the New Zealand market.
Bathurst’s case is that the first performance payment is only triggered when the first 25,000 tonnes of coal is extracted and exported by ship – it argues that “shipped” in cl 3.4 is to be given its ordinary literal meaning, being carriage by ship. This is, it says, a necessary construction, because the commercial purpose of the Agreement was always to extract coking coal from Escarpment for sale into overseas markets. Coal that is exported is always transported by ship in this way.
The second issue is the effect of the new cl 3.10, inserted into the Agreement by the Third Deed. This issue only arises if the first performance payment has been triggered.
L&M says that Bathurst’s entitlement to defer the payment of the first performance payment lasted only so long as it was continuing to pay royalties flowing from ongoing mining – paying no royalties to reflect the absence of mining and coal sales does not contractually justify deferral. L&M makes three arguments, in the alternative, in support of this proposition:
(a)this interpretation flows from the words of the Agreement, interpreted within the commercial context at the time the Third Deed was negotiated; or
(b)if the contractual wording does not sufficiently spell out that the relevant royalties must be from ongoing mining, such a term must be implied to prevent Bathurst from subverting the parties’ bargain; or
(c)even if the contractual documentation is properly construed to allow deferral of the first performance payment in this way, Bathurst’s actions in ceasing mining and invoking cl 3.10 amounted to using a contractual discretion for an improper purpose.
Bathurst says that the straightforward reading of cl 3.10 is that it gives Bathurst flexibility as to the date of making the performance payments, so long as it complies with the royalty deed. It says that this interpretation of the express words of cl 3.10 makes good linguistic and commercial sense without requiring the implication of a term. Moreover, says Bathurst, the term that L&M argues should be implied is not capable of clear expression. As to the proper purpose argument, Bathurst says that the alleged contractual discretion is not of a type to engage the court’s oversight. In the alternative, if the contractual discretion doctrine is engaged, Bathurst’s actions have been in good faith and for proper purposes.
Both the High Court[22] and Court of Appeal[23] found in favour of L&M. They found that the first performance payment obligation had been triggered, rejecting Bathurst’s argument as to the meaning of “shipped”. They also found that cl 3.10 was to be construed to allow deferral only for so long as royalties were actually being paid by Bathurst, neither finding it necessary to imply a term to that effect. The Court of Appeal found that the conditional right to suspend the first performance payment obligation applied only so long as L&M continued to receive royalties from continuing mining and sales at a level not materially less than that which had resulted in the USD 40 million payment being triggered in the first place.[24] Bathurst says that while denying it was doing so, the Court of Appeal’s approach to interpreting cl 3.10 involved nothing less than the implication of a term.
[22]HC judgment, above n 6, at [226].
[23]CA judgment, above n 7, at [104]–[108].
[24]At [96].
In the High Court, Dobson J said, however, that had he been required to do so, he would have implied a term limiting the circumstances in which the cl 3.10 deferral mechanism could be relied upon to where Bathurst was engaged in ongoing mining in the permit areas.[25]
[25]HC judgment, above n 6, at [189]–[190].
The effect of these judgments is that, pending the outcome of this appeal, Bathurst is obliged to pay L&M USD 40 million.[26]
[26]Dobson J found that L&M was entitled to a declaration that the first performance payment had become due and owing, and to an order that Bathurst must pay it: at [226].
The parties’ arguments are rehearsed on this further appeal. Before addressing them, it is necessary to set the parameters of the evidence which the courts may take into account when interpreting written contractual documentation and the circumstances in which a term will be implied into a contract – necessary because the law in each of these areas remains unsettled in New Zealand.
Evidence available to assist in contractual interpretation
Just where to draw the line on the material extrinsic to the written contract that can be admitted into evidence is an important issue in contractual interpretation cases.[27] This material typically falls into three categories: the commercial context and purpose of the contract, evidence of prior negotiations, and evidence of subsequent conduct. A number of policy objectives underlie the question of whether this evidence should be admissible: the desirability of providing the certainty needed to facilitate the efficient conduct of commerce; of holding people to the bargains they make; and of supporting access to justice through the efficient and just conduct of proceedings.[28] Although views may differ as to which approach to admissibility best serves any or all of these policy objectives, there can be little doubt that clarity in the law as to what evidence is admissible is highly desirable.
[27]Oral contracts raise different considerations, which we need not address here. However, for discussion, see David McLauchlan “Contract Formation and Subjective Intention” (2017) 34 JCL 41; and Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776 at [82]–[83].
[28]For a discussion of these policy objectives, see Donald Nicholls “My kingdom for a horse: the meaning of words” (2005) 121 LQR 577 at 587–588; and Andrew Tipping “The subjective and objective dimensions of contract interpretation” [2020] NZLJ 388 at 390–391.
There is a very considerable volume of case law in other jurisdictions and in New Zealand that traverses this issue. In each case, the approach to admissibility is shaped by the test adopted for contractual interpretation, because only evidence relevant to the application of that test is admissible. We start our discussion of the test for contractual interpretation with the following passage from the judgment of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society:[29]
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd.
(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB:
“if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”
[29]Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912–913 (citations omitted).
In Chartbrook Ltd v Persimmon Homes Ltd, Lord Hoffmann revisited the exclusionary rule he described in (3) in respect of pre-contractual negotiations.[30] Lord Hoffmann accepted that there were no conceptual limits to what could be admitted as evidence of background. In principle, he accepted that previous negotiations may be relevant and that it:[31]
… would not be inconsistent with the English objective theory of contractual interpretation to admit evidence of previous communications between the parties as part of the background which may throw light upon what they meant by the language they used.
Nevertheless, he said that policy considerations justified the continuation of the exclusionary rule, and grounds were not made out for departing from it. He said that the admission of such evidence would add to the cost of advice and litigation and create uncertainty; yet there was no evidence that the rule was impeding the development of the law or causing injustice. Evidence of prior negotiations is usually irrelevant to the question the court has to decide, and the claims of rectification and estoppel by convention, operating outside the rule, act as safeguards against injustice.[32]
[30]Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101.
[31]At [33].
[32]At [33]–[42]. Lord Hoffmann would accept that such evidence may be admitted to prove that the parties habitually used words in an unconventional sense, the so-called “private dictionary” principle.
Recent New Zealand law in relation to contractual interpretation has developed with Investors Compensation Scheme as the starting point. This Court’s decision in Firm PI can be regarded as settling the general approach to contractual interpretation.[33] McGrath, Glazebrook and Arnold JJ summarised the approach in this way:
[60] … the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.
…
[63] While context is a necessary element of the interpretive process and the focus is on interpreting the document rather than particular words, the text remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
(footnotes omitted)
[33]Firm PI, above n 10.
As can be seen, the Court adopted Lord Hoffmann’s formulation of the test for contractual interpretation.[34] The Court did not address issues of admissibility in any detail, but it endorsed Lord Hoffmann’s statement that there is no conceptual limit to what can be regarded as admissible “background”.[35] And while it emphasised the primacy of the text to the task of determining meaning, the Court confirmed that it is unnecessary for there to be an ambiguity in the wording of a contract before a court can resort to background or context.[36]
[34]This formulation was itself of older derivation, as was acknowledged by the United Kingdom Supreme Court in Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173 at [10].
[35]Subject, the Court said, to the exception in relation to pre-contractual negotiations, which it did not address: at [60], n 39 and [61], n 42.
[36]See also Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [4] per Blanchard J, [22]–[23] per Tipping J, [64] per McGrath J and [151] per Gault J (expressing agreement with the reasons of Blanchard J).
The Court in Firm PI also clarified the principle of commercial absurdity in relation to contractual interpretation, which is often linked to the use of extrinsic material. McGrath, Glazebrook and Arnold JJ, while emphasising the primacy of the text, accepted that “if a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language might suggest”.[37] However, this does not mean that a court should conclude that a contract does not mean what it says simply because this interpretation would be unduly favourable to one party. There is a need for caution in this area, when “commercial absurdity tends to lie in the eye of the beholder”,[38] and courts are not necessarily well placed for the assessment of what can be industry-specific considerations. Moreover, the compromises that occur in commercial negotiations may not be easily perceived or understood by a court in hindsight, even if exposed as part of the relevant background.[39] Therefore, the conclusion that an ordinary and natural meaning of contractual language produces a commercially absurd result “should be reached only in the most obvious and extreme of cases”.[40]
[37]Firm PI, above n 10, at [89] (footnote omitted).
[38]At [90].
[39]At [91].
[40]At [93].
The objective approach as articulated in Firm PI is one grounded in the policy objectives identified above: the desirability of providing the certainty needed to facilitate the efficient conduct of commerce; of holding people to the bargains they make; and of supporting access to justice through the efficient and just conduct of proceedings. Giving primacy to the written words of the agreement accords with the policy of providing commercial certainty. It also recognises that since the written contract contains the words the parties chose to record their agreement, the language used to do so has to be important. But by allowing a contextual reading of those words, the Firm PI approach recognises both that words have to be read in context and that the promotion of commercial certainty should not be allowed to defeat what the parties actually meant by the words in which they recorded their agreement. The objective approach to this contextual assessment is a legal construct designed as the best way of reliably determining the true agreement as recorded in the words of the contract. It rejects the parties’ subjective evidence of intent as irrelevant to what both parties meant and as generally unreliable. Rather, the court (embodying the reasonable person) assesses the evidence reasonably available to both (or all) of the parties at the point of contract which could bear upon the meaning of those words. Overall, this is a test which best supports the aim of the efficient and just conduct of proceedings.
It is also worth noting that the majority in Firm PI acknowledged “the scope for resort to background is itself contextual”.[41] For example, the approach to extrinsic evidence may be more restrictive where the parties are aware their contract may be relied upon by third parties. The significance of interested third parties for the admissibility of extrinsic evidence in contractual interpretation was expanded on by this Court in Green Growth No 2 Ltd v Queen Elizabeth the Second National Trust (in that case, in the context of registered documents).[42]
[41]At [62].
[42]Green Growth No 2 Ltd v Queen Elizabeth the Second National Trust [2018] NZSC 75, [2019] 1 NZLR 161 at [60] and [73]–[74] per William Young and O’Regan JJ and [151] per Glazebrook J (concurring).
The Court in Firm PI did not address the exclusionary rules concerning prior negotiations and subsequent conduct as articulated by Lord Hoffmann. But that issue, alongside the broader issue of admissibility of extrinsic evidence, has been traversed in other cases, both before and since Firm PI. New Zealand courts have approached the issue of admissibility by reference to a standard of relevance.[43] As a result, New Zealand courts have continued to exclude evidence of uncommunicated subjective intent as irrelevant to the objective approach to contractual interpretation.[44] But the courts have also, reasonably consistently, allowed evidence of prior negotiations to the extent those negotiations would affect the way the language adopted is interpreted.[45]
[43]See, for example, Firm PI, above n 10, at [60]; Gibbons Holdings, above n 11, at [53] and [56] per Tipping J; and AFFCO New Zealand Ltd v New Zealand Meat Workers and Related Trades Union Inc [2017] NZSC 135, [2018] 1 NZLR 212 at [38].
[44]See, for example, New Zealand Air Line Pilots’ Association Inc v Air New Zealand Ltd [2017] NZSC 111, [2017] 1 NZLR 948 at [79] and [83]–[86] per Arnold, O’Regan and Ellen France JJ, [140]–[141] per William Young J and [199] per Glazebrook J (concurring with the majority on this point).
[45]See, for example, Manning v Manning [2013] NZCA 671, (2013) 29 FRNZ 586 at [45]–[59]; and I-Health Ltd v iSoft NZ Ltd HC Auckland CIV-2006-404-7881, 8 September 2010 at [40] (upheld on appeal: i-Health Ltd v iSoft NZ Ltd [2011] NZCA 575, [2012] 1 NZLR 379). However, as prior negotiations are part of the contractual background, the ability to resort to them will be contextual and in some cases restricted: see above at [47].
Nevertheless, around the edges of this broad consensus lie areas of uncertainty, in particular as to the admissibility of subsequent conduct and as to the extent of material that can fall within the rubric of the factual matrix. Given the variety of possible approaches evident in these areas in the case law, and evident even in the approaches to admissibility taken by the Courts below in this case, we think it a fair account that the law in New Zealand remains unsettled.[46] For this reason, and because there has been little discussion to date of the application of the Evidence Act 2006 in this area, we consider there is a need for clarification of the law. This case raises many of the issues as to the admissibility of extrinsic evidence that arise in contractual interpretation cases and we therefore propose to give guidance in this judgment as to those issues.
Parties’ submissions on the admissibility of extrinsic evidence
[46]See Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at 198; Stephen Todd and Matthew Barber Laws of New Zealand Contract (online ed) at [110]; and Tipping, above n 28, at 389. See also below at [84]–[88] as to the different approaches to the admissibility of subsequent conduct in Gibbons Holdings, above n 11.
It is common ground between the parties that the issue of admissibility of extrinsic evidence is an issue of evidence, and is therefore governed, in New Zealand, by the Evidence Act. Bathurst proposes that the touchstone for admissibility is “whether the evidence is capable of demonstrating, objectively, what the meaning is”, which can only be found in evidence that is “mutual, overt and proximate”. On this approach, evidence of a party’s subjective intent is not admissible because it is non‑mutual.
Bathurst submits this approach is consistent with s 7 of the Evidence Act because evidence that falls outside this gateway for admissibility, which it accepts is narrow, is not relevant.
L&M also submits that the touchstone as to admissibility must be relevance in accordance with s 7 of the Evidence Act. While it accepts that evidence of that which is “mutual, overt and proximate” will often be more helpful than evidence which lacks these characteristics, as a test for admissibility it is both “inadequate and over‑prescriptive”. Some evidence which fulfils these criteria may be inadmissible as having no bearing on the disputed interpretation. On the other hand, evidence which is neither mutual nor overt “may be probative” if it “tend[s] … to suggest the correctness of one possible interpretation of the relevant words”. It gives an example of evidence which is not overt but which may reveal a tacit understanding. It submits the “most important requirement for extrinsic evidence is a probative or cogent link” to the text requiring interpretation – it must be “helpful”.
Regarding prior negotiations, L&M submits that this evidence is by definition mutual, and that if the parties’ understanding suggests an “objectively apparent consensus as to meaning operating between the parties”, it may be “helpful”. As to subsequent conduct, L&M submits that such evidence “can be probative without being mutual”, contrary to Bathurst’s position, as the “focus is on cogency”.
The approach to admissibility in New Zealand
The issue of the admissibility of evidence is determined by the laws of evidence.
The approach to be taken to contractual interpretation is governed by the law of contract, but it is the law of evidence that ensures the trial court’s inquiry focusses only on evidence that will materially assist in applying that test. The rules of evidence do not, therefore, operate independently of the law of contractual interpretation. Rather, the law of evidence serves the law of contract. As we discuss more fully below, it is the law governing the interpretation of contracts which fundamentally shapes what is relevant, and what is therefore admissible, extrinsic evidence.[47]
[47]This interaction between the law of contractual interpretation and the admissibility of extrinsic evidence is apparent in the case law in discussions of whether evidence is helpful to that task of interpretation. See, for example, Prenn v Simmonds [1971] 1 WLR 1381 (HL) at 1384–1385 per Lord Wilberforce.
The statement that the issue of admissibility is determined by the law of evidence is not without controversy. It has sometimes been suggested that the parol evidence rule governs the admissibility of extrinsic evidence.[48] The parol evidence rule provides that when parties have reduced a contract to writing, extrinsic evidence is inadmissible to add to, vary or contradict the writing.[49] The issue of whether the rule is properly one of evidence or of substantive law has been hotly debated.[50] But it is well settled that the parol evidence rule does not govern the admissibility of extrinsic material in relation to contractual interpretation, as the interpretation of a contract does not involve any change to or overruling of the written terms.[51]
[48]See the discussion in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] SGCA 27, [2008] 3 SLR(R) 1029 at [32]–[33].
[49]Finn, Todd and Barber, above n 46, at 178. There are also certain preconditions for the rule to apply. For example, the written agreement must be intended to be the whole agreement, and the contract must not be voidable for illegality, fraud, mistake or any other reason.
[50]See, for example, Law Commission of England and Wales Law of Contract: The Parol Evidence Rule (Law Com No 154, 1986) at [2.7]; James Bradley Thayer A Preliminary Treatise on Evidence at the Common Law (Little, Brown and Co, Boston, 1898) (second reprint, Fred B Rothman Publications, New York, 1999) at 390–391; Charles T McCormick “The Parol Evidence Rule as a Procedural Device for Control of the Jury” (1932) 41 Yale LJ 365 at 373–374; and John E Murray Jr “The Parol Evidence Rule: A Clarification” (1965) 4 Duq U L Rev 337 at 340.
[51]Kim Lewison The Interpretation of Contracts (7th ed, Sweet & Maxwell, London, 2021) at [3.90]; Edwin Peel Treitel: The Law of Contract (15th ed, Sweet & Maxwell, London, 2020) at [6-029]; and HG Beale (ed) Chitty on Contracts (33rd ed, Sweet & Maxwell, London, 2018) vol 1 at [13‑130].
It might also be suggested that the exclusionary rule as articulated in Chartbrook was substantive rather than evidential. Again, we do not need to decide that point as the exclusionary rule as articulated by Lord Hoffmann has not clearly been endorsed as part of the law of New Zealand.[52] We are satisfied that in New Zealand, the admissibility or otherwise of extrinsic evidence, and the application of any related exclusionary rules, is to be regarded as an evidential issue, to be determined in accordance with the law of evidence in light of the substantive law on contractual interpretation discussed above.[53]
[52]See below the discussion on this point at [70]–[74].
[53]A similar view was reached by the Singaporean Court of Appeal in Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] SGCA 43, [2013] 4 SLR 193 at [40]–[44]. We note also that in many countries, including Singapore (which shares the basis of its statutory evidence code, the Indian Evidence Act 1872, with India, Pakistan, Bangladesh, Sri Lanka, Myanmar, Malaysia, and several African and West Indies nations), the admissibility of extrinsic evidence to contractual interpretation is expressly addressed in statutory evidence law regimes.
As noted, it was common ground between the parties that in New Zealand it is now necessary to start with the Evidence Act to determine the admissibility of all evidence in court proceedings.[54]
[54]Evidence Act 2006, s 5(3) and s 4(1) definition of “proceeding”.
Section 10 of the Act provides that common law rules are displaced to the extent that they are inconsistent with the Act’s provisions and purposes. It is accordingly clear that the provisions of the Evidence Act have primacy in all questions of admissibility.[55]
[55]Unless there is an inconsistency between the provisions of the Evidence Act and any other enactment: s 5(1).
The purpose of the Act as set out in s 6 is to help secure the just determination of proceedings, including by providing for facts to be established by the application of logical rules, promoting fairness to parties and witnesses, avoiding unjustifiable expense and delay and enhancing access to the law of evidence.
Operating against this background, ss 7 and 8 are the engine room of the Act.[56] Section 7 provides the Act’s “fundamental principle”: that all relevant evidence is admissible unless it is inadmissible or excluded under the Evidence Act or any other Act; and that evidence that is not relevant is not admissible. Section 7 further provides that evidence is relevant in a proceeding “if it has a tendency to prove or disprove anything that is of consequence to the determination of the proceeding”.[57]
[56]They are subject to s 9(1), which provides for the admission of evidence by consent.
[57]Section 7(3).
Applying s 7 in the context of contractual interpretation, evidence is prima facie admissible if it has a tendency to prove or disprove anything of consequence to determining the meaning the contractual document would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract.[58] We say prima facie as relevant evidence may still be inadmissible in terms of s 8, or in terms of one of the Act’s (or any other Act’s) exclusionary provisions.[59]
[58]Subject to the qualification, already noted, that the scope for resort to background is itself contextual: see above at [47] and n 45.
[59]Other exclusionary provisions will no doubt apply only infrequently, given the general nature of evidence called in contractual interpretation cases.
Section 8(1) of the Evidence Act provides:
8 General exclusion
(1)In any proceeding, the Judge must exclude evidence if its probative value is outweighed by the risk that the evidence will—
(a) have an unfairly prejudicial effect on the proceeding; or
(b) needlessly prolong the proceeding.
In the context of contractual interpretation, s 8(1)(b) will often be relevant to a court’s task in determining admissibility. This provision addresses the policy concerns that the admission of extrinsic material will involve unnecessary expenditure of time and resources for the parties and the courts. Where the judge’s assessment is that the probative value of the evidence is outweighed by the risk that it will needlessly prolong the proceeding, the evidence will be excluded.[60]
[60]When weighing the probative value of evidence for the purposes of s 8, the court may have regard to its reliability: see W (SC 38/2019) v R [2020] NZSC 93, [2020] 1 NZLR 382 at [70] and [88(b)] per Glazebrook, O’Regan and Ellen France JJ and [191] per Winkelmann CJ and Williams J.
Bathurst argues that the test for admissibility should be whether the evidence is of conduct which is mutual, overt and proximate. While we accept that these characteristics will usually be good indications of relevance, and often of probative value, they cannot be the test for admissibility given the provisions of the Act. Moreover, as L&M argues, some evidence which fulfils these three criteria may nevertheless be inadmissible as having no bearing on the disputed interpretation. And it is also the case that evidence may lack one or more of the features Bathurst identifies, but nevertheless still be admissible if it is evidence which assists the objective search for meaning. In short, ss 7 and 8 are the touchstones for admissibility, utilising the objective standard for contract interpretation as the standard against which relevance and probative value must be measured.
We propose to outline how this basic framework can be applied to the various categories of extrinsic evidence often sought to be admitted in aid of contractual interpretation.[61] In some cases it is possible to give a strong indication of the likelihood of admission, but even so, we do not lay down hard and fast rules. The Evidence Act governs admissibility, and the situations in which admissibility issues arise are so varied that it is appropriate to provide guidance rather than to attempt rigid rules overlaying the Act. The risk is that in any given case, any such rules could operate in a manner inconsistent with the Act’s provisions.
Declarations of subjective intent
[61]We are not commenting on evidence that may be relevant and admissible for other purposes, such as to support an allegation of an oral contract, or an estoppel, or in support of a claim for rectification.
Evidence of subjective intent falls principally into two categories:
(a)evidence of conduct or statements during negotiations that tends to prove a party’s subjective intent as to what the contract should mean; and
(b)oral evidence proposed to be given at the hearing as to a party’s subjective intent or understanding of the contract.
We deal with category (a) below within the topic of prior negotiations. As to category (b), evidence of what a party subjectively understood or intended as to the meaning of the contract will not be admissible if that was not communicated to the other party prior to contract formation. An undeclared understanding or intention as to the meaning of a contract is not evidence that would have been available to the notional reasonable person having all of the information reasonably available to the parties at the time. It is not therefore relevant to the task of contractual interpretation.
Prior negotiations
The term “prior negotiations” is often used to refer to early drafts of the contract and pre-contractual communications between the parties as they negotiate their agreement.[62] It can also extend to evidence regarding the content of oral negotiations.
[62]Finn, Todd and Barber, above n 46, at 194.
The exclusionary approach in respect of this category of evidence, as outlined by Lord Hoffmann in Investors Compensation Scheme and in Chartbrook, has not been applied in New Zealand for some time. Vector Gas Ltd v Bay of Plenty Energy Ltd has to date been the leading case on the admissibility of prior negotiations in New Zealand.[63] In that case, Blanchard J (with whom Gault J agreed)[64] considered that evidence of prior negotiations was admissible, but only in order to establish the commercial purpose of the contract, its genesis, the background, context and market in which in the parties were operating, and its subject-matter.[65] He reserved his position on how “much further the courts … should go towards admitting evidence of negotiations for the light they may shed on the objective intention of the parties”.[66] And any material “simply declarative of the subjective intentions of one party must be disregarded”.[67]
[63]Vector Gas, above n 36.
[64]At [151].
[65]At [13] and [14].
[66]At [14].
[67]At [14].
Tipping J approached the issue on the basis that relevance was the guiding principle, in accordance with s 7 of the Evidence Act. He held that “[w]hereas evidence of the subjective content of negotiations is inadmissible on account of its irrelevance, evidence of facts, circumstances and conduct attending the negotiations is admissible if it is capable of shedding objective light on meaning”.[68] He concluded that “extrinsic evidence is admissible if it tends to establish a fact or circumstance capable of demonstrating objectively what meaning both or all parties intended their words to bear”.[69]
[68]At [29] (footnote omitted).
[69]At [31]. See also at [27].
Wilson J held that a court – provided “there is genuine and relevant ambiguity” because “the words are not clear or because of internal conflict”[70] – may have regard “to any extrinsic material which assists in assessing objectively the intention of the contracting parties in using the words they did”, except claims of “undeclared intent (what the parties were thinking, in contrast to what they were saying)”, which “cannot possibly assist in ascertaining objective intent”.[71]
[70]At [120].
[71]At [122].
McGrath J agreed with the House of Lords in Chartbrook that the exclusionary rule was valid for policy reasons.[72] He said that admitting evidence of this kind, even when it “would provide a reliable guide to the parties’ intended meaning”, would have significant detrimental consequences to the law of contractual interpretation.[73] However, he accepted that “objective facts existing when the contract was made [that] could be proved by pre-contractual negotiations” were admissible.[74]
[72]At [78].
[73]At [75].
[74]At [70].
As has been observed, the range of approaches evident in Vector Gas left the law unsettled on this point.[75] Nevertheless, courts have tended to follow Tipping J’s approach.[76]
[75]Finn, Todd and Barber, above n 46, at 198.
[76]Finn, Todd and Barber, above n 46, at 198, citing, among other cases, Hall v Attorney-General [2012] NZHC 3615 at [77]; Donovan Drainage & Earthmoving Ltd v Halls Earthworks Ltd HC Auckland CIV-2010-404-29, 2 June 2011 at [9]–[12]; and Bethell v Bethell [2013] NZHC 3492 at [28].
The issue for a judge is whether evidence of prior negotiations tends to prove anything relevant to the notional reasonable person. Evidence of the content of prior negotiations will be inadmissible to the extent that it proves only a party’s subjective intention or belief as to the meaning of the words, or what their undeclared negotiating stance was at the time.[77] That is because such evidence is irrelevant to the objective task of interpretation.[78] Often the prior negotiations will not have addressed (even by necessary implication) the issue that has arisen in the proceedings, because that was an issue not identified by the parties prior to contract formation.[79] Often they will also reveal no more than a negotiating stance adopted by one party that is not agreed to by the other.
[77]See, for example, New Zealand Air Line Pilots’ Association, above n 44, at [79] and [83]–[86] per Arnold, O’Regan and Ellen France JJ, [140]–[141] per William Young J and [199] per Glazebrook J (concurring with the majority).
[78]We note that different considerations apply where the issue is the admissibility of evidence in relation to claims for rectification and estoppel: Finn, Todd and Barber, above n 46, at 195.
[79]David McLauchlan “Contract Interpretation: What Is It About?” (2009) 31 Syd LR 5 at 9–10.
However, if evidence shows what a party intended the words to mean, and that this was communicated, it may tend to show a common mutual understanding as to the meaning of the contract. Logically, the party who claims to have communicated their intention would have to be able to point to something – even if just silence (in circumstances where a reply might be expected) – on the part of the other party to bring that intention into the realm of mutual understanding. Such an understanding is relevant to the objective search for meaning. The evidence will be relevant and, subject to the s 8 assessment, admissible. As Lord Nicholls put the matter, writing extrajudicially:[80]
Why should counsel’s client not be able to give evidence of pre-contract discussions between the parties which cast light on the purpose of [a contractual clause]? Why should it be thought this evidence of the parties’ actual intentions, because that is what this is, can never assist in determining the objective purpose of a contractual provision or the objective meaning of the words the parties have used? The notional reasonable person would be aware of these discussions and, hence, what the parties had in mind. Why should the court be denied this assistance? In everyday life, when interpreting a letter a reader takes into account earlier correspondence. Is a reasonable reader to be worse placed? ... Where such evidence would assist, it is not easy to see why in principle an essentially artificial barrier should be erected against its use.
[80]Nicholls, above n 28, at 581–582.
This interpretation and application of these provisions of the Evidence Act aligns well with its principles and purposes. In terms of those purposes, it is fair to admit evidence tending to objectively prove what parties intended the words to mean to assist with the interpretation of the text of the contract – fair because it is the approach most consistent with holding the parties to their true bargain. But it is also an approach which avoids unjustified expense in litigation by excluding purely subjective evidence (subjective in the sense that it is not reasonably available to the other contracting parties) as irrelevant, and which allows for the exclusion of duplicative or low quality evidence under s 8.[81]
[81]This approach also allows for the exclusion of marginally relevant evidence where its admission would needlessly prolong the proceedings. We note that in Sembcorp, above n 53, the Singaporean Court of Appeal suggested some procedural reforms to address the risk of courts being overwhelmed with extrinsic evidence: at [73]. As we did not hear argument on this point, it is not appropriate for us to comment on it further.
Moreover, this approach strikes a balance between promoting certainty in the law and holding parties to their bargains. It promotes certainty by leaving the text of the contract central to the task of interpretation (and is therefore distinct from a claim for rectification), and by maintaining an objective approach to what constitutes relevant background for that task. It holds parties to their bargains because it allows that text to be interpreted in light of what, objectively assessed, the parties intended the words to mean.
Viewed in this way, the policies that underpin the Evidence Act approach to admissibility meet the competing policy considerations identified by Lord Hoffmann in Chartbrook. In our view, the overall framework of the Act balances those objectives, while better securing the objective of giving effect to the parties’ true agreement than does the application of blanket rules of exclusion. The clarity provided by the Evidence Act should assist parties in determining which evidence to rely upon. And as we have said,[82] prior negotiations will often be irrelevant as not addressing the issues in contention in the litigation or as evidencing only one party’s subjective intent.
[82]Above at [75].
Before we leave this point, we note comments made in the Court of Appeal judgment that the admission of extrinsic evidence risks crowding out the remedy of rectification.[83] In our view, it is important not to overstate this risk. The line between interpretation, rectification and estoppel is adequately preserved through the application of the provisions of the Evidence Act when deciding questions of admissibility. Those provisions keep the focus on the relevance of the evidence to the legal test for the purposes of interpretation, which is the objective interpretation of the contract.
Specialised meanings
[83]CA judgment, above n 7, at [44].
Evidence that tends to prove that the parties have agreed upon a word having a particular meaning – the private dictionary principle – has long been recognised as admissible.[84] In Chartbrook, Lord Hoffmann limited the application of this principle to where parties had used a word unconventionally.[85] Because relevance and probative value are the touchstones for admissibility in New Zealand, this constraint falls away.
[84]This rule has its origins in Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd’s Rep 708 (QB) [The Karen Oltmann]. See also Firm PI, above n 10, at [84].
[85]Chartbrook, above n 30, at [45].
In other cases, evidence has been admitted to show that it is the practice within a particular profession, trade, industry or locality to give a word a specialised meaning.[86]
[86]See, for example, Firm PI, above n 10, at [84]–[87]; and Zeus Tradition Marine Ltd v Bell [1999] 1 Lloyd’s Rep 703 (QB) at 706–707 and 713.
The admissibility of such evidence is now to be determined by applying the Evidence Act. The question is again whether this evidence tends to prove anything relevant to the notional reasonable person tasked with interpreting the contract. Objectively ascertainable evidence, which could include words or conduct, showing that the parties understood words to carry a particular meaning at the time of contract will be relevant – although not necessarily determinative – and subject to s 8. Evidence of one party’s subjective belief as to a particular or specialised meaning is not relevant, and so not admissible, if this evidence would not have been reasonably available to the notional reasonable person at the time of contract.
Subsequent conduct
The term “subsequent conduct” refers to evidence of a party’s or all parties’ conduct in undertaking their contractual obligations after the agreement has been entered into. This issue was discussed by this Court in Gibbons Holdings Ltd v Wholesale Distributors Ltd.[87] Four Judges said that evidence of subsequent conduct was admissible in order to interpret a contract.[88]
[87]Gibbons Holdings, above n 11.
[88]Blanchard J reserved his position. However, he observed that “on the question of whether the subsequent actions of the parties can be taken into account in the interpretation of their contract”, he had “seen no convincing argument against such use and there is force in the argument in its favour”: at [27].
While finding it unnecessary in that case to have regard to the subsequent conduct of the parties, Elias CJ accepted “that how the parties subsequently treated their contractual obligations may be helpful evidence as to the meaning of the contract”.[89]
[89]At [7].
Anderson J said that “where the conduct of the parties logically suggests that they had a mutual understanding of the terms which is inconsistent with ordinary linguistic use, the courts should take into account all relevant and cogent evidence of that conduct, including post-contract conduct”.[90]
[90]At [74] (provided the conduct was that of all parties: at [73]).
Thomas J viewed such evidence as admissible.[91] Unlike the others, Thomas J did not consider the conduct needed to be “common”, “shared” or “mutual”, but thought it could be the conduct of one party alone, at least if that conduct was contrary to the meaning asserted by that party.[92]
[91]At [111], referring to his position in Attorney-General v Dreux Holdings Ltd (1997) 7 TCLR 617 (CA) at 630–633, where he accepted subsequent conduct was admissible.
[92]At [135].
Tipping J said he found “the case in favour of admitting post-contract conduct … distinctly more persuasive than the case for not doing so”,[93] provided it was “mutual or shared”.[94] If, in performing their contract, the parties together conducted themselves “in a way that is relevant to the meaning of the disputed provision, the court should be able to take that into account”.[95] It is right to record, however, that Tipping J later refined this in Vector Gas, preferring the approach he articulated in that same case in relation to the admissibility of prior negotiations:[96]
[31] There is no logical reason why the same approach should not be taken to both post-contract and pre-contract evidence. The key point is that extrinsic evidence is admissible if it tends to establish a fact or circumstance capable of demonstrating objectively what meaning both or all parties intended their words to bear.
[93]At [55].
[94]At [53]. Tipping J appeared to recant on the “mutual or shared” requirement in Vector Gas, above n 36, at [30].
[95]At [60].
[96]Vector Gas, above n 36.
Again then, we proceed on the basis that the law, not being settled on this point, requires clarification. We agree with Tipping J that the approach to the admissibility of subsequent conduct should be the same as the approach to the admissibility of prior negotiations. Applying the provisions of the Evidence Act, the court must ask itself whether the subsequent conduct tends to prove anything relevant to the objective approach to interpretation. Subsequent conduct need not necessarily be mutual, but non-mutual conduct is more likely to be relevant to a claim of estoppel. Further, in assessing the relevance of subsequent conduct, it must not be forgotten that the court is interpreting the contract as at the time it was made.[97]
[97]This temporal restriction is particularly clear in Canada. In McDonald Crawford v Morrow 2004 ABCA 150, (2004) 348 AR 118 at [72], Côté JA said that the interpretation of a contract “cannot depend on the stage or time at which one party chooses to go to court and have it interpreted. A contract must be interpreted as at the date it was made, not later” (citations omitted). See also Geoff R Hall Canadian Contractual Interpretation Law (2nd ed, LexisNexis, Ontario, 2012), which says that it is “a fundamental proposition of contractual interpretation that a contract is to be interpreted as of the date it was made”, and therefore unlike statute law, a contract’s interpretation cannot change with evolving social norms: at 52.
To the extent that evidence of subsequent conduct may cross the relevance threshold (which we suggest will not be often), s 8 is likely to come into particular play. Care will be needed to assess the probative value of that evidence. For example, conduct that occurs post-dispute is very unlikely to be admissible. By then, the parties will have retreated into their respective corners, and their conduct may well be self‑serving. Its admission is likely to add time and cost, especially in light of the inevitable calling of rebuttal evidence. Another example of problematic evidence is where the subsequent conduct is that of executives of corporate parties to the contract who had no involvement with negotiating the contract and no knowledge of its background. Such evidence will not be probative if their actions do not represent the views of the relevant corporate party at the time the contract was formed.
Test for implication of terms: the same as interpretation?
The issue of the implication of a term arises only if Bathurst is successful in its argument that the Court of Appeal was wrong to interpret cl 3.10 as limiting Bathurst’s right to defer the first performance payment, without the need for the implication of any limiting words.
Two principal types of contractual terms are described as “implied terms”.[98] The first is default terms brought into operation not on the basis of any intention of the parties, but rather by operation of law – the classic example of this category is terms implied under Part 3 of the Contract and Commercial Law Act 2017.[99] The second is terms said to be implied “in fact” to give a contract business efficacy – this form of implication is based on an intention imputed to the parties by the courts,[100] often referred to as presumed intention. It is this second category of implied term at issue on this appeal.
[98]There is a third category of implied term which arises much less frequently – terms implied by custom in a particular trade or area of business.
[99]Terms are also implied by the common law. For example, courts are becoming more willing to imply a duty of good faith in certain types of contract: see the discussion below at [227]–[229]. See also Beale, above n 51, at [14-028]; and Finn, Todd and Barber, above n 46, at 213–216.
[100]Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 (HL) at 137 per Lord Wright.
The law in this area has been thrown into uncertainty in recent times by the decision of the Privy Council in the case Attorney General of Belize v Belize Telecom Ltd.[101] Lord Hoffmann, writing for the Board, sought to restate the principles in relation to implied terms. But far from settling those principles, this judgment has excited a great deal of controversy in case law and in academic writing as to whether it has fundamentally changed the law governing implication of terms.[102]
[101]Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988.
[102]See, for example, the discussions in Spencer v Secretary of State for Defence [2012] EWHC 120 (Ch), [2012] 2 All ER (Comm) 480 at [52]–[59]; and David McLauchlan “Construction and implication: in defence of Belize Telecom” [2014] LMCLQ 203.
Prior to the decision in Belize, the following passage from Lord Simon’s judgment in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings was the most commonly cited authority in New Zealand in relation to the implication of terms:[103]
… for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[103]BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 (PC) at 283. See, for example, the authorities set out in Finn, Todd and Barber, above n 46, at 217, n 243.
In Belize, Lord Hoffmann did not disapprove this test but said that it was:[104]
… best regarded, not as [a] series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so.
[104]Belize, above n 101, at [27].
In a passage which has caused controversy, he described the implication of a term as an exercise in the construction of the instrument as a whole.[105] He said that where the instrument does not expressly provide for what is to happen when some event occurs, the most usual inference in such a case is that nothing is to happen. If the parties had intended otherwise, the instrument would have said so.[106] But on some occasions, the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen:[107]
The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.
[105]At [19]. Lord Hoffmann used the expression “instrument” because the case itself concerned articles of association.
[106]At [17].
[107]At [18].
Lord Hoffmann emphasised the objective nature of the exercise the court is required to undertake, cautioning against becoming diverted into “barren” discussion as to how the actual parties would have reacted to the proposed implied term.[108] As to the test to be applied, he said:
[21] It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. … [T]his question can be reformulated in various ways which a court may find helpful in providing an answer—the implied term must “go without saying”, it must be “necessary to give business efficacy to the contract” and so on—but these are not in the Board’s opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?
[108]At [25].
He therefore placed the test for implication of terms within the same conceptual framework as contractual interpretation – framing the fundamental question for the court as what the instrument would convey to a reasonable person, having all the background knowledge which would have been reasonably available to the contracting parties.
The judgment has been treated variously as an unremarkable but compelling restatement of the existing law in relation to implication of terms, and as a radical shift in the law which equated the interpretation of a written contract with the implication of a term.[109]
[109]See generally McLauchlan, above n 102, for a discussion of these views.
In New Zealand, Belize was referred to with apparent approval by Tipping, McGrath and Wilson JJ in this Court’s decision in Dysart Timbers Ltd v Nielsen – although the approach to the implication of a contractual term was of only peripheral relevance to the issue in that case.[110] However, in the later case of Mobil Oil New Zealand Ltd v Development Auckland Ltd,[111] this Court said that there was scope for argument as to whether the undiluted adoption of Lord Hoffmann’s approach in Belize was appropriate, noting that it had been “significantly qualified” by the United Kingdom Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd.[112]
[110]Dysart Timbers Ltd v Nielsen [2009] NZSC 43, [2009] 3 NZLR 160 at [25], n 12 per Tipping and Wilson JJ and [62] and [64], n 43 per McGrath J.
[111]Mobil Oil New Zealand Ltd v Development Auckland Ltd [2016] NZSC 89, [2017] 1 NZLR 48.
[112]At [81], citing Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742.
The term the “relevant royalty payments” in cl 3.10 is somewhat opaque, but given the clear direction that the royalties being addressed are those payable under the royalty deed, the “relevant royalty payments” would appear to be the payments at the rates determined under cl 4 of the royalty deed. In the absence of any new requirement in relation to the payment of royalties and any obligation on the part of Bathurst to develop and exploit the mine, the “relevant royalty payments” must be only those required to be paid under the royalty deed. Since there is currently no mining in the permit areas, the royalty payments are either zero or low amounts reflecting sales from a stockpile. That may not be a particularly attractive outcome from the point of view of L&M, but it is the one that L&M, a major commercial entity carrying on business in the mining industry, agreed to.
In the High Court, Dobson J commented that the quantum of royalties expected to be paid under cl 3.10 was at large. Yet both he and the Court of Appeal were prepared to interpret “relevant royalty payments” as having a quantum that was not at large, but was rather “commercially realistic” (to use the Court of Appeal’s words).[235] In our view, the best judges of what is commercially realistic are the substantial commercial entities that entered into the Third Deed.[236]
[235]Bathurst Resources Ltd v L&M Coal Holdings Ltd [2020] NZCA 113 (Kós P, Gilbert and Goddard JJ) [CA judgment] at [96].
[236]As noted in the joint reasons above at [45], this Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 pointed out that courts are not necessarily well placed to assess the commercial common sense of a contractual provision: at [89]–[93].
The reality facing the parties when the Third Deed was entered into was that Bathurst would be prevented from accessing capital markets to obtain the finance it needed to develop the mine unless some concession in relation to the payment of the performance payments was made. L&M agreed to this concession because it perceived it to be in its interests not to frustrate the potential for Bathurst to develop the mine in this way. L&M could easily have required the payment of interest for delay in paying the performance payment. Under the royalty deed, for example, there is a provision for the payment of default interest if royalties are not paid on the due date. That is the commercially standard way of compensating a payee for late payment of an amount owing, but the parties in this case chose not to use it. In effect, the higher royalty amount was a substitute for default interest.
In our view, cl 3.10 simply required royalty payments to be made under the royalty deed as and when the royalty deed required them. The parties obviously assumed that this would be a continuous stream of royalty payments, but there was no legal obligation behind that to ensure that assumption became reality. L&M’s agreement to accept elevated royalty payments as compensation for late payment of the performance payments involved an acceptance that the compensation for late payment was tied to the winning and sale of coal from the mine, something entirely within the control of Bathurst.
There was always a chance that the royalty payment stream would be interrupted. For example, there could have been an accident at the mine. There is nothing to indicate that an interruption in royalty payments (possibly a prolonged one) in such an event would have meant Bathurst lost its protection under cl 3.10. What actually happened was that prices for coking coal fell, making the mine uneconomic. That was always a possibility. So, the expression “continue to be made” must have had an element of conditionality to it. The most obvious one is that the payments had to be made only when the royalty deed required them to be.
The fact that Bathurst is now focussed on its joint venture operation with Talley’s Group Ltd involving the mining of assets acquired from Solid Energy New Zealand Ltd seems to us to be a red herring in the context of the interpretation exercise. It cannot affect the interpretation of cl 3.10. Would the interpretation be different if Bathurst had not become a party to the Talley’s joint venture but still deferred mining operations in the permit areas? It is hard to see how that could be the case. Bathurst would have deferred development anyway if the international price for coking coal had made it unattractive for Bathurst to incur further capital cost in establishing the mine, or if it had been unable to raise the finance to do so.
With the fall in international coking coal prices, Bathurst reduced its capital expenditure and deferred construction of the proposed conveyor system, focussing instead on low‑cost extraction of thermal coal to meet contractual obligations to Holcim. It was common ground that international coal prices are volatile and had entered a period of negative volatility at the time of the Third Deed. A sophisticated and experienced vendor like L&M can be expected to have required express provision in the contract for the downside (to it) of that volatility, if it considered this was necessary.
On the Court of Appeal’s analysis, the royalty payments (at the same low rate as applied when the performance payment was triggered, based on the volume of low value coal sold to Holcim) were required to render the arrangement commercially realistic. That would have provided very modest compensation to L&M for the unpaid USD 40 million, unless production had been substantially increased.[237] The Court of Appeal’s analysis is that L&M must have contracted for a level of compensation that could be extremely low, but not lower than what the Court of Appeal considered to be the commercially realistic amount.[238] We do not see any justification for interpreting the clause in that way. If L&M wished to ensure the level of compensation was fixed, or at least had a minimum level, it could easily have required that to be provided for in the Third Deed. It did not.
[237]See the joint reasons above at [189] and n 189.
[238]CA judgment, above n 235, at [96].
We conclude that the “relevant royalty payments” referred to in cl 3.10 are the royalty payments that are, or became, payable under the royalty deed. We do not agree that “relevant royalty payments” should be interpreted as royalty payments equal to those arising from a level of mining consistent with that which triggered the performance payment.[239]
Implied term?
[239]See the joint reasons above at [174].
The Chief Justice and Ellen France J would, if necessary, have implied a term into the Agreement that Bathurst ceasing to mine on a level equating to that which triggered the obligation to make the performance payment (while, at the same time, refusing to pay the USD 40 million payment that has become due) is a breach of the Agreement.[240] As noted in the joint reasons, this differs from the elaborate term pleaded by L&M,[241] and the modified version of the term advanced by L&M at the hearing in this Court.[242]
[240]At [201].
[241]It is doubtful, for the reasons set out above at [256], that compliance with the term implied by the Chief Justice and Ellen France J would have been sufficient to comply with the pleaded term, which required a level of royalties reflecting “the proceeds of ongoing mining and substantive coal sales, thereby providing commercial value for [L&M] being denied receipt of a sum otherwise due and owing”.
[242]The term advanced at the hearing in this Court was that in order to rely on cl 3.10, the relevant royalty payments must reflect the proceeds of ongoing mining. L&M submitted that this impliedly prohibited Bathurst from disabling itself from fulfilling the condition in cl 3.10. As noted in the joint reasons above at [204], n 200, the evidence that would be relevant to this was not considered in this context in the Courts below.
We have a different starting point for our analysis, because on our interpretation of cl 3.10, Bathurst’s deferral of its obligation to pay the performance payment has not created an actionable breach. The term that would need to be implied for L&M to succeed would be a term that Bathurst is not entitled to the benefit of cl 3.10 unless Buller Coal is actually paying L&M royalties at or above a certain minimum level (for example, the level equating to that which triggered the obligation to make the performance payment).
We do not think there is a sufficient evidential basis for us to consider the alternative implied term proposed by L&M, namely a term prohibiting Bathurst from disabling itself and Buller Coal from paying royalties.[243] We do not think it is clear that, even if such a clause was implied, Bathurst did, in fact, disable itself (and Buller Coal) by entering into the Talley’s joint venture and mining the Stockton mine as part of that joint venture. And we see such a provision as inconsistent with the structure of the Agreement, given it did not oblige Bathurst to mine at any minimum level or place any restriction on Bathurst from undertaking mining operations elsewhere.
[243]See the joint reasons above at [204].
We agree with the Chief Justice and Ellen France J that neither the further assurances clause nor the entire agreement clause stands in the way of the implication of a term.[244] We say no more about them.
Application of principles to this case
[244]See above at [218]–[221].
We propose to address the principles governing the implication of terms as set out in the joint reasons and apply them to the present case.[245]
[245]Above at [116].
The first of these principles is that the legal test for the implication of a term is a standard of strict necessity, which is a high hurdle to overcome. We do not accept that such a necessity arises in the present case. As we have already noted, there was always a real possibility that L&M would not receive more than the initial USD 40 million payment.[246] L&M must have accepted this. All cl 3.10 did was expand the circumstances in which that possibility arose. That may not have turned out to be a wise choice by L&M, given the circumstances as we now know them to be,[247] but there is still a coherent contract in place between the parties and the possibility of a further performance payment becoming payable is not yet ruled out. This case therefore does not get over the high hurdle of strict necessity, in our view.
[246]See above at [243].
[247]But would have been satisfactory from L&M’s point of view if the assumption of a working export coking coal mine had eventuated.
The second principle is that if a contract does not provide for an eventuality, the usual inference is that no contractual provision was made for it. In the present case, the contract was between two significant commercial entities, both operating as experienced coal mine investors. The potential difficulties in establishing a mine in the permit areas and the very substantial amount of capital that would have been required to do this was well known to L&M. While the parties seemed to assume that if 25,000 tonnes of coal was shipped from the permit areas, the mine must already have become operational for the long term, the Agreement and the Third Deed did not impose any obligations in that regard.
The third principle is that the implication of a term is part of the construction of the written contract as a whole. Our interpretation of the contract is set out above, and we see that as a coherent contract, albeit one that is not favourable to L&M in the circumstances that have arisen. We do not consider it is necessary to imply a term into the contract to arrive at the correct understanding of what the contract means.
The fourth principle is that implying a term is an objective inquiry – it is the understanding of the notional reasonable person with all the background knowledge reasonably available to the parties at the time of the contract that is to be applied. As we see it, the parties chose to provide for the higher rate of royalty as a proxy for the cost of delaying the performance payment. But they chose not to specify any minimum level, in circumstances where they knew there was no minimum requirement in the royalty deed. It is telling that the pleaded implied term, the term implied by the High Court, the term advanced at the hearing and the term implied in the joint reasons all refer to different levels of royalty payment as being required. Also, as noted in the joint reasons, there would still be questions of degree. For example, how far Bathurst could go to reduce or even temporarily halt mining without attracting liability for the performance payment would always be a moving question of degree and circumstance.[248] While it is true that Cooke P in Vickery v Waitaki International Ltd accepted some questions of degree may be acceptable,[249] it must be remembered that the consequence of not meeting the level of royalties required by the implied term triggers a USD 40 million payment obligation. In a commercial contract, such a degree of uncertainty about such a large liability seems to us undesirable and an indicator that the implication of the term is not appropriate.
[248]See the joint reasons above at [192] and [215].
[249]Vickery v Waitaki International Ltd [1992] 2 NZLR 58 (CA) at 65.
The fifth principle is that the implication of a term does not depend upon proof of the parties’ actual intentions. In the present case, the parties did not (for the most part) seek to argue for an implied term based on actual intentions anyway.
The sixth principle is that the BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings conditions are a useful tool to test whether the proposed term would spell out what the contract, read against the relevant background, must be understood to mean.[250] Because this is the first case in which we have applied our principles, it is helpful to also explain how we would see the BP Refinery conditions assisting in the analysis in this case. We deal with those conditions below.
BP Refinery conditions
[250]BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 (PC) at 283. The conditions are set out in the joint reasons above at [94].
The BP Refinery conditions, and our comments on them, are as follows:
(a)The implied term must be reasonable and equitable: we do not think a clause requiring a minimum level of royalty payments would have been unreasonable and inequitable, but nor do we see the absence of such a clause as unreasonable or inequitable.
(b)The term must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it: we do not consider that the implication of a term is necessary to give business efficacy to the contract in this case. We expand on this below.
(c)The term must be so obvious that “it goes without saying”: as is apparent from our earlier analysis, we do not consider this factor as met in this case. As we note in relation to (d) below, a number of proposed implied terms have been considered, which indicates a lack of obviousness. And if the development of the mine had proceeded as the parties seem to have assumed it would, there would not have been any need for an implied term as the differential royalty scheme would have been a commercially workable arrangement.
(d)The term must be capable of clear expression: as noted earlier, there are several different versions of the proposed implied term.[251] Each can potentially be expressed clearly. The difficulty is identifying which one should be implied.
(e)The term must not contradict any express term of the contract: as indicated earlier, we consider the proposed implied term would be a contradiction in this case.[252]
[251]See above at [266].
[252]See above at [260]. The comment we make there applies equally to any of the proposed implied terms.
The Chief Justice and Ellen France J consider that cl 3.10 does not have business efficacy if it allows Bathurst to cease mining and stop paying royalties while also not paying the performance payment, because this would deprive L&M of most of the commercial value of the transaction.[253] We do not agree that cl 3.10, interpreted as we interpret it above, deprives L&M of most of the commercial value of the transaction. As already indicated, we think this overlooks the fact that L&M has already received USD 40 million under a contract where it was always a very distinct possibility that no development of a mine would occur and therefore no further payments would be made.[254] The additional payments were performance‑based. Similarly, the concession made in cl 3.10 was made because the parties realised that the possibility of Bathurst being in breach of the Agreement if it failed to make the first performance payment at the 25,000 tonne trigger point would be an impediment to Bathurst raising the capital needed to develop the mine. L&M had good reason for making this concession because of its shared interest in the development of the mine, given the future royalty revenue and performance payment entitlements that a fully developed and operating mine would confer.
Conclusion
[253]See above at [209].
[254]See above at [243].
We do not consider that the requirements for the implication of a term are met in this case. We would therefore decline to imply a term.
Proper purposes
The argument made by L&M in relation to proper purposes is not addressed in the joint reasons.[255] It was clearly a fall‑back argument, and we can address it briefly.
[255]See above at [224]–[226].
The essence of the argument was that cl 3.10 confers on Bathurst a contractual discretion, and this discretion must be exercised for proper purposes. L&M’s argument is that Bathurst has exercised what it classifies as “contractual discretions” for improper purposes, by deciding not to develop the mine in the permit areas for the foreseeable future (and to mine elsewhere), and not to pay the performance payment that would be due but for the operation of cl 3.10.
The High Court Judge rejected this argument on the basis that if Bathurst was correct as to the scope of cl 3.10, then Bathurst’s conduct in reliance upon cl 3.10 did not involve the exercise of a contractual discretion “of a type where the Court can imply a constraint on the purposes for which that discretion can be exercised”.[256]
[256]HC judgment, above n 228, at [210].
The Court of Appeal did not address this argument.
L&M argued that the High Court Judge erred in concluding that cl 3.10 conferred an absolute contractual entitlement on Bathurst. Rather, it argued that Bathurst had a contractual discretion as to the manner in which future mining operations would be conducted following the 25,000 tonne threshold being reached, and whether it would make the performance payment or rely on cl 3.10 to make higher royalty payments instead. As cl 3.10 gave Bathurst these choices, it was correctly classified as a discretion and must therefore be exercised honestly and in good faith, and not arbitrarily, capriciously or unreasonably.[257]
[257]Citing Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The “Product Star”) (No. 2) [1993] 1 Lloyd’s Rep 397 (CA) at 404.
Bathurst supported the analysis of the High Court Judge. It said cl 3.10 of the Third Deed and cl 4.1(d) of the royalty deed together recognise and protect a specific contractual power, which cannot sensibly be categorised as a discretion.[258]
[258]Clause 4.1(d) of the royalty deed provides that the higher, 10 per cent, rate of royalty is payable by Buller Coal until the performance payment is made by Bathurst. Clause 4.1(d) is quoted in full in the joint reasons above at [178].
In Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (trading as Medirest),[259] Jackson LJ reviewed the authorities on contractual discretions and contrasted contractual discretions with absolute contractual rights. He observed that the former involves “making an assessment or choosing from a range of options, taking into account the interests of both parties”.[260]
[259]Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (trading as Medirest) [2013] EWCA Civ 200, [2013] BLR 265.
[260]At [83].
We think it is clear that, in the present case, the contractual rights under cl 3.10 cannot be classed as contractual discretions that could be subject to review by a court on the basis that they were exercised for an improper purpose. Clause 3.10 simply provides for a modification of cl 3.4 as to whether delay in paying the performance payments is an actionable breach. While it is true that Bathurst could choose not to take the benefit of cl 3.10, that could be said about most contractual rights. That choice does not convert the contractual right into a contractual discretion. We agree, therefore, with the High Court Judge’s analysis. Given that conclusion, the proposed further evidence that L&M sought to adduce serves no useful purpose and we decline leave to adduce it.
The good faith variant on the proper purposes argument that is mentioned in the joint reasons was not relied on by L&M and, even if it had been, would not have assisted its case.[261] As already indicated, we do not consider there is a sufficient evidential basis for concluding that Bathurst’s decision to enter into the Talley’s joint venture and devote its attention to developing and operating the joint venture’s mining assets demonstrates a lack of good faith in relation to its obligations to L&M under the Agreement. As we have noted, there was nothing in the contractual arrangements between Bathurst and L&M that required Bathurst to mine within the permit areas in preference to any other mine, and nothing requiring that, once mining in the permit areas commenced, it could not be stopped. We agree with the joint reasons that the issues relating to the place of good faith in contract law are best left for another day.
Conclusion
[261]See the joint reasons above at [227]–[229].
We conclude that Bathurst was entitled under cl 3.10 to delay payment of the performance payment, which would otherwise have been an actionable breach of cl 3.4 of the Agreement. We agree with the orders as to disposition of the appeal and costs set out in the joint reasons.[262]
[262]At [230]–[231].
Solicitors:
MinterEllisonRuddWatts, Wellington for Appellants
Chapman Tripp, Wellington for Respondent
[60]–[63], [77]–[79], [84] and [88]–[93] per McGrath, Glazebrook and Arnold JJ (Elias CJ and William Young J reserving their positions).
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