Iron Ore New Zealand Limited v Rio Tinto Mining and Exploration Limited HC Christchurch CIV 2009-409-1947

[2010] NZHC 1120

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2009-409-001947

BETWEEN  IRON ORE NEW ZEALAND LIMITED Plaintiff

ANDRIO TINTO MINING AND EXPLORATION LIMITED First Defendant

ANDATTORNEY-GENERAL Second Defendant

Hearing:         4 June 2010

Counsel:         A C Hughes-Johnson QC and G A Hair for Plaintiff

P R Jagose and S Fairbrother for First Defendant
J D Kerr for Second Defendant

Judgment:      11 June 2010

JUDGMENT OF FOGARTY J

[1]      The plaintiff (IONZ) sues the first defendant (RTME) in contract and the

Attorney-General by way of an application for judicial review.

[2]      The plaintiff has made application to the Court for orders directing a separate trial for issues in contract between IONZ and RTME, but deferring the question of damages as a consequence, directing an allocation of an early fixture and setting a timetable.

[3]      IONZ and RTME hold exploration permits under the Crown Minerals Act

1991 for a term of five years commencing on 30 September 2009.

[4]      Nine days before, by a letter dated 21 September, IONZ wrote to RTME

cancelling an agreement between them.   This agreement had been entered into on

17 January 2007.    As  a  result  of  this  agreement  the  Minister  had  transferred  a prospecting permit in the name of IONZ into the joint names of IONZ and RTME.

[5]      The letter cancelling the agreement had a number of grounds.   These are repeated and to a degree amplified in the current statement of claim.

[6]      The pleadings contend for a number of breaches by RTME.  RTME is said to have failed to complete a program of sampling and analysis for a minimum of 300 new samples to identify potential target areas for subsequent exploration as required by the permit work program.  This was a breach of the condition of the prospecting permit.

[7]      I should add by way of parenthesis that the subject matter of these mining permits are iron sands under the sea on the West Coast of the North Island of New Zealand, mainly north of New Plymouth.   Second, that the scheme of the Crown Minerals legislation is a series of permits from prospecting to exploration to mining. These permits are granted after the Crown has approved a program of work.

[8]      In  the  pleading  there  are  further  complaints  that  RTME  did  not  take appropriate steps under the agreement between the two parties to provide reports to IONZ of the work being carried out and that RTME breached confidentiality provisions.   It is pleaded that there was an implied term of the agreement that the program of sampling and analysis would involve either auger drilling or deep trenching and that RTME would act expeditiously.  It is said that these implied terms were  breached.    It  is  also  contended  that  RTME  had  failed  to  get  appropriate consents under the Overseas Investment Act 2005 which enabled IONZ to cancel the agreement by way of a statutory provision of that Act, s 26.  There are other causes of action, including inducement to enter into the agreement upon a misrepresentation that RTME would conduct extensive auger drilling.

[9]      It may be noted that IONZ does not plead any specific terms of the agreement which either makes an obligation of the essence or provides for termination.

[10]     The Contractual Remedies Act 1979 provides for cancellation of contract in s 7:

7         Cancellation of contract

(1)       Except as otherwise expressly provided in this Act, this section shall have effect in place of the rules of the common law and of equity governing the circumstances in which a party to a contract may rescind it, or treat it as discharged, for misrepresentation or repudiation or breach.

(2)       Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.

(3)       Subject to this Act, but without prejudice to subsection (2) of this section, a party to a contract may cancel it if -

(a)       He has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to that contract; or

(b)A term in the contract is broken by another party to that contract; or

(c)       It  is  clear that a  term in the contract will  be  broken  by another party to that contract.

(4)       Where subsection (3)(a) or subsection (3)(b) or subsection (3)(c) of this section applies, a party may exercise the right to cancel if, and only if, -

(a)       The parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to him; or

(b)The effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be, -

(i)        Substantially to reduce the benefit of the contract to the cancelling party; or

(ii)      Substantially to increase the burden of the cancelling party under the contract; or

(iii)      In  relation  to  the  cancelling  party,  to  make  the benefit or burden of the contract substantially different from that represented or contracted for.

(5)       A party shall not be  entitled  to cancel the contract  if,  with  full knowledge of the repudiation or misrepresentation or breach, he has affirmed the contract.

(6)       A party who has substantially the same interest under the contract as the party whose act constitutes the repudiation, misrepresentation, or breach may cancel the contract only with the leave of the Court.

(7)       The  Court  may,  in  its  discretion,  on  application  made  for  the purpose, grant leave under subsection (6) of this section, subject to such terms and conditions as the Court thinks fit, if it is satisfied that the granting of such leave is in the interests of justice.

[11]     Mr Hughes-Johnson QC agreed that at least in part IONZ would have to satisfy the criteria contained in s 7(4)(b).

[12]     Therefore,  in  at  least  part  of  its  contractual  claim,  IONZ  will  have  to establish:

1.       Breach of an express or implied term;

2.That the breach has substantially reduced the benefit of the contract to the cancelling party.

I note that the misrepresentation pleading falls into the same category, s 7(3)(a).

[13]     IONZ has mining expertise, significant expertise it would seem, but there is a natural inference that it has formed a relationship with Rio Tinto via RTME because a substantial partner is necessary.  Plainly, the benefit of the arrangement to IONZ is that RTME brings know how and access to capital or the ability to borrow which IONZ does not have, for a project of this scale.   To get some idea of the scale IONZ has estimated that the potential value of the iron ore capable of being extracted, on current prices, is in the order of billions.    It is under the sea.   It will have to be recovered by dredging using the latest technology.

[14]     In the affidavits seeking an urgent fixture one of the reasons IONZ gives is that it has other potential partners, Chinese interests, who would replace Rio Tinto.

[15]    If IONZ establishes breaches of contract by RTME before that justifies cancellation it will have to establish, on the probabilities, that such breaches substantially reduce the benefit of this contract to IONZ.

[16]     RTME would appear, at the present time, anyway, to want to stay with this contract.   Their counsel advises the Court that they are continuing with the exploration work as per the program which was the basis of the grant of the exploration permit by the Minister.

[17]     IONZ is seeking to review the decision of the Attorney-General to refuse to transfer the exploration permit into the sole name of IONZ.   That application was made after the notice of cancellation.  It was made in reliance on s 36 of the Crown Minerals Act.    That was probably a mistake, as Mr Hughes-Johnson has acknowledged.  The Crown contends such an application should be made under s 41. From the Crown’s perspective the permit holder is IONZ and RTME jointly.  The application to change the permit from a joint holding to IONZ was made only by IONZ, and under s 36 which enables the Minister to amend conditions of a permit. The Minister declined.

[18]     By contrast s 41 provides for transfer and other dealings with permits.   In summary it requires the Minister to agree to a transfer after the permit holder has entered into a private agreement for transfer, on such conditions as the Minister thinks fit unless in his or her opinion special circumstances exist.

[19]     In short, the Crown’s position is that no transfer of the exploration permits, as presently granted, can be done by the Minister until there is another agreement or arrangement providing for such transfer.   That means that the Minister cannot do anything while the parties are in dispute as to whether or not the present agreement has been cancelled.  The Attorney-General considers that the application for review against him is misconceived.

[20]     The application before this Court is for an early hearing on the question as to whether or not the agreement has been validly cancelled.  Thus, it can be separated into two parts:

1.        Whether or not there should be a separate trial on cancellation; and

2.        Whether or not there should be an early fixture.

[21]     A third part of the application is seeking timetable directions.

[22]     I have set out those grounds in summary.  In the interval between the lodging of the application  and the hearing there has been some movement between the parties on the position of the applications for review of the decision of the Attorney- General.   At the commencement of the oral hearing Mr Hughes-Johnson recorded that  the  plaintiff  is  likely  to  discontinue  the  action  for  damages  for  breach  of statutory duty against the Attorney-General.  As already noted Mr Hughes-Johnson also  acknowledged  in  argument  that  the  application  to  the  Attorney-General inasmuch as it was based on s 36 may have been in error of law.

[23]     The oral argument focussed principally on whether there was justification for splitting the issues between IONZ and RTME between a trial on liability and another on damages.

[24]     There is no need to set out in any detail the criteria by which such issues are decided.   There is common ground between the parties that the applicant for separation  has  a  burden.    Such  applications  are  not  readily granted.    They  are scrutinised carefully by the Court because history shows that intended short cuts can sometimes in fact extend the litigation out over a considerable period of time.

[25]     There was a measure of agreement that this case should be brought to trial swiftly.  Plainly, IONZ does not want to continue in its business relationship with RTME.  Obviously, it is important for parties in such a venture to both want to be there, if at all possible.   On the other hand, it is no principle of commercial law, whether viewed in contract or equity, that corporations can walk from a relationship simply because they no longer want to be in it.  Here the parties have elected to bind themselves in contract, in a significant document running for many pages, and are both embedded in a statutory process of permits from prospecting through to exploratory to mining, controlled by a Minister of the Crown, which imposes obligations on them whatever their private disputes.

[26]     All that said, if the cancellation by IONZ is valid it is just that that be identified as soon as possible.  That is justice not only to IONZ but also to RTME,

and its principal Rio Tinto.  Mr Jagose for RTME did not want to be bundled into a trial at short notice, without appropriate interlocutory steps, but on the other hand, agreed readily to case management which would promote an efficient disposal of the case.

[27]     Accordingly, the issue ultimately dividing the parties is whether the plaintiff should have its wish that the question of whether the contract has been cancelled be tried first, separated from the question of remedy in damages.

[28]     IONZ’s principal argument for severance is that it fears that unless it is able to resolve the ownership issue in the near future legislative changes will occur which will have the ultimate result of preventing IONZ from taking any part in the mining of the iron sand resource in question.   The legislative change it refers to is the Seabed and Foreshore Reform.   It says there is no certainty about the timing or content of this reform.  As to the content it is at least possible that the new legislation will have the effect of preventing the obtaining of a mining permit over these iron sands.  Further, it is possible that new legislation will mean that the Minister is no longer able to deal with the issue of entitlement to the permits, under s 41.

[29]     On 31 March last the Government issued a consultation document reviewing the  Foreshore  and  Seabed  Act  2004,  seeking  submissions  to  close  on  Friday,

30 April.  Amongst other things, IONZ rely on the last paragraph of the foreword to that  document  by the  Attorney-General.    It  is  appropriate  to  set  out  the  entire foreword:

The background to the Foreshore and Seabed Act 2004 (‘the 2004 Act’) is well known.   It was a legislative response to the decision by the Court of Appeal in Attorney-General v Ngati Apa [2003] 3 NZLR 643 (CA). The

2004 Act has proved to be anything but an enduring solution.  Significant numbers of New Zealanders have complained and continue to complain that

the 2004 Act is unfair and discriminatory.

The National Party and the Maori Party agreed to review the 2004 Act in their Relationship and Confidence and Supply Agreement of 16 November

2008.  A distinguished Ministerial Review Panel (‘the Panel’) was appointed

by me and reported on 30 June 2009. The Panel unanimously concluded that the 2004 Act is a failure.  It advised repeal and enactment of replacement legislation.   The  government carefully considered the  report  and, in the months since the Panel reported, has been engaged in an extended conversation with iwi representatives and other interested parties to canvass

options for an enduring solution.  This consultation document is the fruit of that labour.

Over the next month the Minister of Maori Affairs, the Associate Minister of Maori Affairs and I will be attending numerous hui and public meetings around  New  Zealand.    The  aim  of  those  meetings  is  to  consult  with interested parties on the government’s proposals for reform.   We are very interested in your views.  They matter.  Following that round of consultation, I shall be reporting to Cabinet.  Final Cabinet decisions can be expected in late May and June 2010.

It cannot be over-emphasised that the aim of all this work is to find a just and enduring solution.  A significant number of New Zealanders think the

2004 Act has been divisive and should be repealed.  As we work to develop

a solution, the challenge for us all will be to avoid dogmatic responses to a complex issue and, instead, to seek to reconcile various interests for the benefit of all New Zealanders.

Hon Christopher Finlayson

Attorney-General

[30]     Affidavits have been filed by the plaintiff’s principal, Mr J G Rutherford, and in response by Ms K S Price, a principal adviser in the Foreshore and Seabed Unit within the Ministry of Justice, and Mr M P Anastasiadis, the Manager Compliance of the Crown Minerals Division of the Ministry of Economic Development.  In these affidavits the various deponents scope the context of IONZ argument and the significance of the risk.

[31]     Parliament  has  the  supreme  power to  make  law.    It  has  never  been  the function of the Court to predict what Parliament will do, nor to suggest any constraints on what Parliament does.  It is a constitutional convention that the Court and Parliament hold each other’s roles in mutual respect.  In that context it is also not the function of the Court to predict what Ministers of the Crown will introduce into the House by way of legislation, nor to offer any comment whatsoever as to their desirable content.  It would be extraordinary for the Court to breach this convention directly or indirectly.

[32]     It is not necessary in this case.   IONZ’s argument does not take sufficient account of the fact that it is a holder together with RTME of an exploration permit. By s 32 of the Crown Minerals Act holders of exploration permits have certain rights to subsequent permits.  Section 32(3) of the Crown Minerals Act provides:

32       Right of permit holder to subsequent permits

...

(3)      Subject to sections 22, 27, and 43, and subsection (7), and unless the exploration permit expressly provides otherwise, if the holder of an exploration permit satisfies the Minister that he or she has, as a result of activities authorised by the permit, discovered a deposit or occurrence of a mineral to which the permit relates, the permit holder shall have the right, on applying under section 23 before the expiry of the exploration permit, to surrender the permit insofar as it relates to the land in which the deposit or occurrence exists and to be granted in exchange a mining permit for that land and mineral.

[33]     The qualifications in ss 22, 27, and 43 are not relevant to IONZ’s seabed and foreshore concerns.

[34]     Section 32(7) provides:

(7)       The Minister may not grant an exploration permit or a mining permit under this section in respect of minerals that are privately owned.

[35]     IONZ’s concern appears to be that as a consequence of the Seabed and Foreshore reform Parliament will enact a new law which makes the iron sands under the sea privately owned.   That is a step that Parliament can take at any time.   It always has been able to take it.   What is clear, however, is that the contractual dispute between IONZ and RTME is irrelevant to that risk.   For example, were Parliament to vest the iron sands in private interests by statute, so that subs (7) applies, and were it a consequence that as a result the Minister could not grant a mining  permit  to  the  holder  of  the  exploration  permit,  that  consequence  would follow whether or not the holder is IONZ and RTME jointly or IONZ wholly.  Were that to happen while IONZ and RTME are still engaged in this litigation, the consequence of the statutory reform would fall to be considered along with the consequences of the disposition of the contractual dispute between the holders of the permit.   For example, were there to be some compensatory provisions in the new statute for holders of exploration permits being denied the expectation of a mining permit, the entitlement to those compensation proceedings would be disposed of to the ultimate holder in law of the permit.  In the normal course of events the Court could dispose of the private contract rights as between IONZ and RTME before or in association with the Crown disposing of any compensation provisions.  If there were

no  compensatory  provisions  it  would  not  matter  who  was  the  holder  of  the exploration rights at the time of the change of law.

[36]     Exploration  permits  have  an  associated  program  of  work,  of  which  the normal cycle is three to five years.   There is no immediate prospect of a mining permit being granted.  The issue as to who will hold a mining permit is in any event some  years  into  the  future.    The  present  issue  is  who  is  entitled  to  hold  the exploration permit.

[37]     For these reasons there is no foundation for the Court to order an urgent hearing of this case, and to facilitate that, divide the issues of liability from quantum, in order to dispose of the ownership rights of the permit prior to any statutory reform of the seabed and foreshore law.

[38]     The  principal  argument  for  severing  the  causes  of  action  against  the Attorney-General is that the Minister cannot make an informed decision on an application to transfer the relevant permits pursuant to s 41 of the Act until the private rights of IONZ and RTME have been disposed of.  Yet there is no doubt, as has  been  scoped,  that  if  the  private  rights  are  settled  or  disposed  of  a  fresh application can be made pursuant to s 41 following the disposition or resolution of the private right issues.   The current claims against the Minister of Energy are associated with his rejection of the earlier application under s 36.   Those are past events.  Those causes of action appear able to be resolved either by consent or by narrow legal argument now, or in the normal way at the trial.

[39]     The second argument for separating off the damages claim is that it will be difficult to identify IONZ’s entitlement to damages should it succeed in upholding the cancellation of the contract, until the Minister has made further decisions and further time has passed.

[40]     The principal weakness of this argument is that in order to obtain declarations that the cancellation is effective the plaintiff will have to engage on the standard of whether or not proved breaches have substantially reduced the benefit of the contract for  the  cancelling  party.    Inevitably  that  engagement  will  have  to  address  the

difference between the arrangements between IONZ and RTME continuing as compared to a counter-factual being the conduct of an arrangement between IONZ and a new partner commencing some reasonable time after the notice of cancellation on 21 September 2009.    To decide whether the benefits between those alternative scenarios are substantially different will require the consideration of evidence and likely expert opinion on matters including:

(a)       How swapping joint venture partners will affect the timeline of the project;

(b)Whether or not the changes in timeline or partner will significantly affect the costs of the project;

(c)       Whether  or  not  a  change  of  partner  will  significantly  affect  the division of rewards between IONZ and RTME or a new partner.

[41]     These are essentially the same issues that go to assessing damages.  Putting to one side the existing claims against the Minister, and assuming that statutory provisions are not changed, it is likely that the Minister will follow both the terms of s 41 and the constitutional convention of the Crown respecting the disposition of private issues in the Courts, when considering an application under s 41 to give effect to a Court’s judgment.  Therefore it is unlikely that experts will consider the need for a s 41 transfer to give effect to a disposition of the Court will significantly affect the assessment of damages.  If this assessment now turns out to be wrong at a later date, there is always the opportunity, at that later date, for the Court to sever the issue of damages.

[42]     I am satisfied that there is no basis for severance of the liability issues with RTME and the Crown, nor for the severance of the liability and damage issues of RTME.  In reaching these conclusions I am also satisfied that this is a case which will require significant discovery and therefore it is not possible for it to be fast tracked.  There is an obvious common interest, however, on the part of both IONZ and RTME (confirmed by counsel for those parties before me) for an efficient and timely disposition of the issues between the parties.   Where parties to a litigation

want the case to be heard quickly and efficiently, that is the best platform for so disposing of the case.   This case will therefore be remitted back for active case management before an Associate Judge.

Result

1.The plaintiff’s application for an order directing an early hearing on specific questions and other directions is dismissed.

2.The first and second defendants are entitled to costs, to be calculated on a 2B basis.

3.If the parties cannot agree costs counsel are to exchange drafts of argument to be limited to five pages and to file the same.  I will then make orders.

Solicitors:

Malley & Co, Christchurch, for Plaintiff Chapman Tripp, Wellington, for First Defendant Crown Law, Wellington, for Second Defendant