L&M Coal Holdings Ltd v Bathurst Resources Ltd
[2018] NZHC 2127
•17 August 2018
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-Ā-TARA ROHE
CIV-2016-485-1007
[2018] NZHC 2127
BETWEEN L&M COAL HOLDINGS LIMITED
Plaintiff
AND
BATHURST RESOURCES LIMITED
First Defendant
BULLER COAL LIMITED
Second Defendant
Hearing: 12-16 February; 19-23 February; 26-27 March 2018 Counsel:
A R Galbraith QC and D R Kalderimis for plaintiff
J E Hodder QC, R J Gordon and D P MacKenzie for defendants
Judgment:
17 August 2018
RESERVED JUDGMENT OF DOBSON J
Contents
Introduction........................................................................................................................................................ [1]
Background to the dispute.............................................................................................................................. [5]
Outline of the issues........................................................................................................................................ [21]
The development of the assets..................................................................................................................... [22]
Relevant contractual provisions................................................................................................................. [28]
Scope of the evidence..................................................................................................................................... [31]Objections to evidence as to contractual intentions............................................................................... [36]
The nature of the contract............................................................................................................................ [41]
Issue one: Meaning of “shipped” in clause 3.4 of the ASP................................................................... [58]
Contractual context.................................................................................................................................... [65]
Subsequent conduct.................................................................................................................................... [85]
Other usage by the parties......................................................................................................................... [95]Dictionary definitions................................................................................................................................ [98]
Case law..................................................................................................................................................... [104]
Expert evidence on usage........................................................................................................................ [108]
Construction coal excluded..................................................................................................................... [110]
Issue two: Interpretation of clause 3.10.................................................................................................. [114]
L&M COAL HOLDINGS LTD v BATHURST RESOURCES LTD [2018] NZHC 2127 [17 August 2018]
Did clause 3.10 alter the prior contractual position?........................................................................ [115]
Nature of Bathurst’s alternative payment obligation......................................................................... [130]
2013 clarification..................................................................................................................................... [148]Issue three: Implied term in clause 3.10................................................................................................. [156]
Issue four: Use of contractual discretion for other than a proper purpose................................... [191]
Issue five: Did Bathurst use clause 3.10 for a proper purpose?....................................................... [212]
Outcome.......................................................................................................................................................... [226]
Costs................................................................................................................................................................. [228]
Introduction
[1] This proceeding involves a dispute between the parties over performance of a contract for the sale of permits to explore for and mine coal on the Denniston Plateau on the west coast of the South Island (the permit areas).
[2] The plaintiff (L&M) is a company incorporated under the laws of Belize and has its business office in Hong Kong.1
[3] The first defendant (Bathurst) is a company registered under the laws of New Zealand and has its registered office in Wellington. It is in the business of mining natural resources, including coal. At relevant times, Bathurst was a company listed both on the ASX and NZX.2
[4] The present transaction was structured as a sale of all the shares in the second defendant, L&M Coal Limited, which was an L&M subsidiary that owned the assets that were the subject of the transaction. L&M Coal Limited subsequently changed its name to Buller Coal Limited.
Background to the dispute
[5] The relevant contract (the ASP) was executed in June 2010. Its provisions relevantly included:
1 Promotional materials in the evidentiary bundle referred to links to the former publicly listed company on the New Zealand Stock Exchange (NZX) that had a long-standing reputation in the New Zealand mining industry. However, there was no evidence as to the nature of the connection. Mr Geoff Loudon, who effectively governed L&M when this contract was completed, had held interests in the former listed entity.
2 Bathurst has been listed on the ASX throughout, and was listed on the NZX between September 2010 and July 2015.
· Payment of a non-refundable deposit of US$5 million, and consideration of US$35 million to be paid on settlement, which occurred in November 2010.
· Two further performance payments of US$40 million each would become due on defined volumes of coal being shipped from the permit areas. The first performance payment was due when Bathurst had shipped 25,000 tonnes of coal, and the second payment when one million tonnes of coal had been shipped.
· When the second performance payment was due, or if Bathurst received notice of an offer to acquire more than 50 per cent of its shares (or notice of a transaction having substantially the same effect), Bathurst was obliged to issue fully paid ordinary shares representing five per cent of the then current post-issue share capital of Bathurst.
· In addition to that sequence of payments, Bathurst was obliged to pay royalties on amounts received for sales of coal. The detailed royalties provisions were recorded in a separate deed of royalty, a draft of which was annexed to the ASP and which was separately completed in August 2010 (the royalty deed). The initial royalty rate was 10 per cent of gross sales revenue of coal, but after the first performance payment was made the rate would drop to five per cent until the second performance payment was made, and thereafter would be 1.75 per cent.
· If Bathurst was constrained by regulatory requirements, or for any other reason, from issuing shares to L&M when the second performance measure was achieved, then in lieu of the issue of those shares the relevant royalty rate in the royalty deed would increase by two per cent.
[6] For much of the period between completion of the ASP in 2010 and mid to late 2016, the evidence suggests a constructive and co-operative relationship between the parties. L&M demonstrated flexibility in not strictly enforcing its contractual
terms, and provided assistance to Bathurst to enable it to perform the remaining contractual obligations.
[7] It was apparent that Bathurst’s ability to raise sufficient funds to make the performance payments would depend on it demonstrating the viability of coal production from the permit areas.
[8] In August 2012, the parties entered into a deed of amendment (the third amendment) that addressed the consequences of Bathurst not paying the performance payments when they became due. The operative part of the third amendment inserted cl 3.10 into the ASP, which provided:
For the avoidance of doubt, the parties acknowledge and agree that a failure by the Purchaser 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.
[9] Recovery of coal from the Escarpment Mine within the permit areas was delayed much longer than the parties anticipated at the time of the ASP by challenges to the resource consents that were eventually granted for the mining operation. Extraction of coal occurred between September 2014 and approximately March 2016. Between early 2015 and March 2016, approximately 50,000 tonnes were extracted, but Bathurst has not paid the first performance payment of US$40 million.3
[10] In March 2016, Bathurst announced that it was to suspend mining operations at the Escarpment Mine, and placed the mine into “care and maintenance”. As a result, Bathurst has ceased paying royalties, except for modest amounts payable from small sales of coal from a stockpile.
[11] Bathurst has subsequently acquired a majority interest in another mining venture (BT Mining) that purchased a number of coal mining interests from Solid Energy in a contract entered into in October 2016. That contract was settled in August 2017 and relates to the North Island coal mines at Rotowaro and Maramarua, as well as the existing open-cast mine at Stockton on the west coast.
3 A graph produced as schedule 7 to Bathurst’s closing submissions notes that production ended in the fourth quarter of 2016 with 6.1 million tonnes of coal having been produced.
[12] Bathurst’s business plans for its west coast mining interests contemplate the ex-Solid Energy resources being exploited before the resumption of mining at Escarpment or other prospects within the permit areas acquired from L&M. That sequence has been decided upon despite the ex-Solid Energy areas not having all necessary regulatory consents.
[13] L&M commenced this proceeding in December 2016. It seeks a declaration that the first performance payment has become due and owing, and an order that Bathurst pay US$40 million to L&M, together with interest and costs.
[14] L&M’s case is that from some point in 2014, Bathurst’s board decided on a change of strategy. Instead of working to establish the feasibility of mining operations within the permit areas and raising the capital to make the performance payments required under the ASP, Bathurst would instead deny that any further obligations were owed under the ASP and pursue a course of action intended to support that denial on legal and factual grounds as managed by Bathurst.
[15] Bathurst’s first response to the claim is that the first performance payment is not due because coal produced from the Escarpment Mine has been sold for domestic use (principally to Holcim, a west coast producer of cement). Bathurst contends that this coal has not been “shipped” because it has not involved carriage by sea, so arguably does not count in quantifying relevant production.
[16] Bathurst says that the essential focus of the coal mining prospects that were the subject of the ASP was the extraction of high quality hard coking coal, the only market for which is in metallurgical use overseas. It treats the presence within the permit areas of quantities of lower grades of coal, for which there may be a domestic market for thermal purposes, as merely incidental or fortuitous. Arguably, the parties were focused on the export prospects, in which event “shipped” would inevitably involve carriage by sea.
[17] In addition to disputing Bathurst’s narrower interpretation of when coal is “shipped” from the permit area, L&M argues that Bathurst cannot rely on cl 3.10 to defer paying the first performance payment when it is not paying the royalties that it
says the parties contemplated would compensate L&M for the delay in receiving the first performance payment. L&M submits that this limitation on Bathurst’s entitlement to rely on cl 3.10 arises either as a matter of interpretation or, if necessary, by the implication of a term to that effect.
[18] Bathurst’s response is to argue that cl 3.10 affords it an option which it is lawfully exercising, namely Bathurst stands ready to pay all royalties that become payable in terms of the royalty deed, but that amount is practically zero because of the absence of mining activity. The ASP, including cl 3.10, contemplates that contingency and there is no actionable default.
[19] If L&M is unsuccessful in limiting Bathurst’s resort to cl 3.10 because Bathurst’s argument in the preceding paragraph is upheld, then L&M would argue that cl 3.10 introduced a discretion as to how Bathurst would pay for the assets, and Bathurst’s conduct has amounted to the exercise of that discretion other than for proper purposes.
[20] Bathurst’s rejoinder to this alternative argument is that there is no relevant constraint on the options available to it as business conditions evolve. There is no provision in the ASP compelling it to maintain production in all or any circumstances. Arguably, a very substantial reduction in the price of high quality coking coal justified the decision to cease production. Accordingly, non-payment of royalties is simply a consequence of Bathurst deciding not to produce coal and non-payment of the first performance payment is not a breach of the ASP because cl 3.10 confirms that it is not.
Outline of the issues
[21]Accordingly, the issues in the case are:
· First: Has the coal extracted and transported from the Escarpment Mine been “shipped” so as to trigger the first performance payment?
· Second: If so, does a proper construction of the “no default” acknowledgement in cl 3.10 allow Bathurst to deny liability for the first performance payment while paying only nominal royalties?
· Third: If the limitation on Bathurst resorting to the “no default” acknowledgement in cl 3.10 does not arise as a matter of interpretation, does an implied term arise having the same effect?
· Fourth: If the terms of cl 3.10 do permit Bathurst to deny liability for the first performance payment when it is also not paying royalties, is its discretion to do so subject to a constraint that it be exercised only for proper purposes, consistent with the intent of the contract?
· Fifth: If a proper purpose constraint on Bathurst’s resort to cl 3.10 does apply, then has L&M made out the exercise by Bathurst of that discretion other than for a proper purpose?
The development of the assets
[22] There has been coal mining activity on the Denniston and Stockton Plateaux on the west coast since the late 1800s. From about 1960, permits to explore and mine coal resources in the area were predominantly held by the State-owned coal mining organisations that became Solid Energy. In the 1990s and early 2000s, Solid Energy relinquished their permits for much of the area, including the permit areas involved in this litigation.
[23] In February 2003, L&M applied for an exploration permit over parts of the area that had been relinquished by Solid Energy. That permit was granted in January 2005. A second exploration permit for an adjoining but smaller area was acquired in February 2009. The exploration permits would run for initial periods of five years.
[24] L&M undertook exploration work within the permit areas that involved a review of the records of coal resources previously undertaken, a geographical mapping exercise and new drilling and coal quality analyses.
[25] L&M’s work identified promising coal resources. The Escarpment Mine was seen as the most attractive development project, with the prospect of progressing to mine in the Deep Creek area relatively nearby. It was contemplated that mining would be done on an open-cast basis. This involves stripping away the layers of material covering seams of coal, extracting the coal and then reinstating the area by replacing the material that had been removed.
[26] By mid to late 2008, L&M was seeking partners to join in exploitation of the resource. An alternative for L&M was to sell the development prospects to others. Mr Geoff Loudon, who was then in effect the sole director of L&M,4 was introduced to Mr Hamish Bohannan, then chief executive of Bathurst, in London in October 2009.
[27] At that time, Bathurst had mining interests in the state of Kentucky in the United States, but was seeking opportunities elsewhere. Further negotiations ensued, with an initial letter of offer sent in December 2009 and then a binding letter of intent signed in February 2010. In June 2010, the ASP was executed on terms broadly consistent with the earlier binding letter of intent.
Relevant contractual provisions
[28] The ASP transferred ownership of all the shares in L&M Coal Limited that owned the assets. The ASP contained numerous obligations on both parties, including pre-settlement. For example, it obliged both parties to use all reasonable endeavours to obtain regulatory consents. Both parties provided warranties relevant to performance of their contractual obligations and there was a provision in conventional terms that the ASP constituted the entire agreement between the parties, superseding any previous understandings or agreements. The ASP obliged Bathurst to complete a separate royalty deed and also a guarantee and security deed pursuant to which L&M Coal Limited would guarantee Bathurst’s performance and provide a first ranking security over all of the assets to secure payment of all amounts payable to L&M.
4 As a matter of form, L&M’s parent company, Auriferous Mining Limited, was the sole director until 2015. Mr Loudon was a director of the parent company and represented it in the governance of L&M.
[29] Bathurst was responsible for procuring the completion of a Definitive Feasibility Study (DFS). Its completion to Bathurst’s reasonable satisfaction was a condition to be satisfied prior to settlement. The ASP was also conditional on Bathurst arranging sufficient finance to pay the settlement cash consideration of US$35 million. Those conditions were both satisfied.
[30] The guarantee and security deed and the royalty deed were completed in August 2010.
Scope of the evidence
[31] It is unnecessary to provide an extensive summary of all of the evidence that was called. L&M called evidence from:
· Mr David Manhire, a geologist who had worked for, and more recently been a contractor to, L&M since 1987. Mr Manhire described the assessments that had been undertaken of the coal mining prospects in the permit areas in the period up to execution of the ASP.
· Mr Duncan Gordon, who is based in Adelaide, South Australia, and whose corporate advisory firm was retained by L&M to market the coal mining assets. Mr Gordon helped prepare valuations of the assets and was involved in the negotiations for L&M with Bathurst that led to the letter of intent and the ASP.
· Mr Geoff Loudon, who currently lives in Christchurch and is a trained geologist with more than 50 years’ experience in the mining industry. Interests associated with Mr Loudon are significant shareholders in the ultimate owner of L&M. He was effectively the controlling director of L&M throughout the period in which the ASP and amendments to it were completed, and remained one of three directors between April 2015 and February 2017 when he resigned. Mr Loudon led negotiations for L&M and made decisions on acceptable terms for the sale to Bathurst.
· Mr Gregory Hogan, who currently lives in Australia but who worked for L&M between June 2002 and completion of the ASP. Mr Hogan dealt with commercial aspects of the mining operation, such as permit applications and L&M’s relationships with third parties. He was involved in a number of the meetings leading to completion of the binding letter of intent and the ASP and was a line of communication between Mr Loudon, the decision- maker for L&M, and those representing Bathurst.
· Mr Michael Brogan, formerly a Sydney based chartered accountant and now a Hong Kong resident director, including of L&M. Mr Brogan was appointed to the board of L&M’s parent company in September 2011. He had no involvement with the completion of the ASP, but was involved when the third amendment was completed in July 2012.
· Mr Hamish Bohannan, a mining company executive with over 30 years’ experience in that industry. He currently lives in Perth and works in Indonesia. Between 2008 and March 2015 Mr Bohannan was chief executive and a director of Bathurst. Mr Bohannan gave evidence from his perspective as the principal negotiator of the ASP for Bathurst.
· Mr Graeme Duncan, an expert called on behalf of L&M. He holds Bachelor and Master’s degrees in engineering (mining) and is a member of the Australasian Institute of Mining and Metallurgy. He provided opinion evidence on the feasibility of Bathurst economically mining the high quality coking coal from the Escarpment Mine.
[32]Bathurst called the following witnesses:
· Mr Richard Tacon, who has been employed by Bathurst since March 2012 and has been its chief executive since March 2015. Mr Tacon has worked in the mining industry for 37 years in New Zealand and Australia. He explained Bathurst’s approach to assessment of the mining resources purchased from L&M, the difficulties encountered in attempting to exploit those resources, and Bathurst’s present intentions with its larger portfolio
of mining assets in this part of the west coast. Prior to L&M’s opening, Mr Tacon provided a commentary to an aerial view, filmed by a drone, of the topography of the Escarpment Mine, and other mining prospects in the vicinity.
· Mr Marshall Maine, who was Bathurst’s chief financial officer between March 2013 and March 2015. He described the tough economic times encountered by Bathurst during the period he was employed there. He was directly involved in attempts to raise capital and in the preparation of financial statements for the company in that period. His evidence addressed decisions made to write down the value of the assets obtained from L&M, and a corresponding write-off of the performance payments that had formerly been recognised as liabilities.
· Mr Tokorangi Kapea, who has been a member of Bathurst’s board of directors since May 2013 and was chairman of that board between May 2015 and January 2018. Mr Kapea gave his perspective on attempts to raise capital in 2013, the board’s decision not to develop the Escarpment Mine and the board’s perspective on the writing down of assets and liabilities that had been acquired from L&M. Mr Kapea also addressed the board’s perspective on the decision to place the Escarpment Mine on care and maintenance.
· Mr David Clarke, a solicitor who was a partner at Russell McVeagh until 2016. In that capacity, he acted for Bathurst on legal work in respect of a capital-raising initiative in mid-2013. At that time, he was involved in communications intended to clarify the third amendment’s meaning for the purposes of describing Bathurst’s obligations in offer documents issued in the capital-raising exercise. Mr Clarke was present at a meeting with Ms Brigid McArthur, L&M’s lawyer who drafted the third amendment. With L&M’s authority, she met with representatives of Bathurst and explained her perspective of the third amendment.
· Mr Dean Fergusson, a Christchurch based consultant who is a chartered professional geologist. He has a Bachelor of Science in earth science and Master’s degree in geology, and has been a member of the Australasian Institute of Mining and Metallurgy for more than 20 years. Mr Fergusson has spent a large part of his career as an employee of Solid Energy and its predecessors. He opined on the reasonableness of Bathurst’s decision in February 2014 to defer development of the Escarpment Mine, and the March 2016 decision to place the mine under care and maintenance. He also opined on the reasonableness of the view taken by Bathurst that it has not been feasible to develop the Escarpment Mine and explained why he disagreed with the opposite conclusions expressed by Mr Duncan.
· Mr Christopher Russell, who has been involved in the coal industry since 1978 and whose work has focused on the logistics of transporting bulk cargoes of coal. Mr Russell provided his opinion on the use of the word “shipped” in coal logistics in New Zealand.
[33] Both sides served and filed briefs from accounting experts. L&M retained Mr Tim Fairhall, a retired audit partner from PricewaterhouseCoopers. He opined on the appropriateness of Bathurst’s impairment in 2014 of the assets acquired from L&M and on the standards he considered should apply to revisiting that impairment regularly in preparation of financial statements for subsequent periods.
[34] In response to Mr Fairhall’s brief, Bathurst served a brief from Professor Tony van Zijl, who is a professor of accounting and financial management at Victoria University of Wellington. He expressed somewhat different views on the application of appropriate accounting standards to the treatment and need for reconsideration of impaired assets.
[35] Counsel agreed during the hearing that it was unnecessary to cross-examine either of the accounting experts. I was invited to take their briefs as read and form my own views on the opinions they expressed, to the extent they became relevant to issues in the case.
Objections to evidence as to contractual intentions
[36] Numerous passages in the briefs of evidence of L&M’s factual witnesses contained statements about what those witnesses intended when negotiating the terms of the ASP, and their beliefs as to what contractual terms meant.
[37] At the outset of the trial, Bathurst raised an objection that such passages were inadmissible and should not be read. At that stage, I ruled that the challenged passages be treated as admissible de bene esse, on the basis that I would revisit their admissibility in light of the totality of the evidence.
[38] I was persuaded to adopt that stance by Mr Kalderimis, who characterised the challenged passages as a combination of permissible evidence about the context in which the ASP had been negotiated and evidence of shared belief as to what both parties intended. This last characterisation depended on the proposition that the statements of witnesses who were involved for L&M coincided with, or were confirmed by, the recollection of Mr Bohannan, who negotiated the terms of the ASP for Bathurst.5
[39] On a review of all the evidence after it had been tested in cross-examination, I am satisfied that a number of the challenged passages are no more than subjective recollections of a participant with some involvement in the contractual process, or matters of subjective understanding by individuals. As such, they are not admissible and I have disregarded them.
[40] On the other hand, I am satisfied from the evidence of Messrs Loudon and Bohannan that they were ad idem as to what they intended the ASP to record. To the extent that the evidence establishes mutual intentions, I consider it is admissible on that topic.6 Where the principals negotiating a contract subsequently confirm that they shared the same view of what was to be intended by the terms of the contract when it was being negotiated, in the terms of Wilson J in Vector Gas Ltd v Bay of Plenty
5 See Ruling 1, issued 19 February 2018. The relevant content of that ruling up to [16] is annexed to this judgment.
6 See, for example, Partenreederei M.S. Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd’s Rep 708 (QB) [The Karen Oltmann], discussed in more detail at [60]–[61] below.
Energy Ltd they can “illuminate, in advance of consensus being achieved, what the parties were intending to achieve in their contract”.7 Alternatively, such evidence of shared intention as to contractual meaning is within the concept of “background” as Arnold J acknowledged it in Firm PI 1 Ltd v Zurich Australian Insurance Ltd.8
The nature of the contract
[41] Counsel were agreed that a primary influence, if not the determinative factor, in deciding many issues in the case was the character to be attributed to the ASP. The parties characterised it in starkly different terms. L&M described it as a contract for the sale and purchase of assets, with provision for partial deferred consideration to be treated as a form of vendor finance. L&M treated the conditions on which that vendor finance would become payable as not out of the ordinary, and that transporting the first 25,000 tonnes of coal from the permit areas had triggered Bathurst’s obligation to make the first performance payment. There was no element of a joint venture about the conduct of the business. L&M was concerned to facilitate performance by Bathurst of its remaining obligations under the ASP, but had no interest in, or ability to influence, whether and in what way mining activities were undertaken. Instead, the ASP required Bathurst to comply with the terms of all permits that were issued, and to keep the permits in good standing.
[42] Bathurst characterised the ASP as the transfer of opportunities to exploit coal mining resources for which it paid the initial consideration of US$40 million. Thereafter, the parties shared the risks on economic extraction of the coal, with no certainty that the conditions for further payments would be fulfilled. For instance, the necessary permits and consents to conduct mining may never have been obtained, and if the price of high quality coking coal collapsed (as did occur) there could be no expectation that Bathurst would be obliged to conduct mining activities on an uneconomic basis.
[43] The ASP was concluded in the knowledge that Bathurst did not have the financial resources to make substantial payments without establishing the viability of
7 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [122].
8 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]. See Ruling 1 at [7]–[9].
export coal operations. Therefore the performance payments provided for would only be received by L&M if the numerous risks were overcome and economic mining on a commercial scale was undertaken.
[44] Bathurst characterised the ASP as a long-term venture under which it was in complete control of the assets and had unconstrained opportunities to develop (or sit on) the mining resources as it saw fit in its own interests. It emphasised the inherently risky and uncertain prospects for the venture at the time the ASP was concluded.
[45] Bathurst also characterised the ASP as focusing on the export opportunity for high quality coking coal. Assessments of the resources acknowledged (on Bathurst’s view only incidentally) the presence of lower quality thermal coal for which there would be a domestic market, but the important aspect of the resource on Bathurst’s characterisation was the prospect for exporting hard coking coal.
[46] In contrast, L&M characterised the ASP as a sale of the permits and accumulated mining opportunities, which included a not immaterial component of thermal coal that would likely only be sold domestically.
[47] The structure and terms of the ASP reflect what commercial parties would reasonably expect of a conventional sale and purchase agreement, transferring property in all the shares that give a right to the assets held by that company in return for amounts to be paid in cash. The ASP includes conditions about when the subsequent components of the cash consideration would be paid, without any acknowledgement of an issue as to whether those payments would be made. Given that the contingency relates to US$80 million, some reference to the contingency of the payments not becoming due might be expected, if indeed that was in the parties’ contemplation.
[48]Instead, “aggregate consideration” is described in unqualified terms:
3.1… the aggregate consideration payable for the purchase of the shares shall comprise …
To similar effect, the stipulation for payment of the performance payment is simply in terms that the purchaser “shall pay the Vendor … US$40 million within 30 days”.
[49] As to the extent to which the prospects for the business were risky and uncertain, Bathurst could rely on the DFS, the completion of which to its reasonable satisfaction was a condition of settlement.9 Together with the research conducted by L&M and other data available to Bathurst, it was able to make a well-informed assessment prior to the ASP becoming unconditional.
[50] The DFS was compiled by a Melbourne consultancy, Marston & Marston, with input from various expert consultants, as well as L&M and Bathurst. It contains 1,573 pages and appears as an extensive identification of business risks and analysis of them. As an appendix to the definitive study in respect of the Escarpment Mine, it also contains a preliminary assessment of the neighbouring mine within the permit area at Deep Creek.
[51] The DFS included a discounted cash flow (DCF) valuation for rates of return on the proposed investment. That applied variables for a range of business conditions including labour, diesel, capital and direct cash costs, as well as coal revenue and exchange rates. The DCF valuation was calculated both if the Escarpment Mine was developed standing on its own (about 18 per cent) and if it was combined with the subsequent development of Deep Creek, which projected a DCF rate of return at about 35 per cent.
[52] The DFS included a section on risk assessments, recognising some 31 risks to successful development of the business. Two risks proven wrong by history were the period of five months projected as required to obtain the necessary consents, and the price projection of hard coking coal. The latter projection appears to have adopted reasonable, if not conservative, projections used in the industry, but failed to identify the extent of the drop in prices in later years. The DFS also qualified its projections and, in some respects, recommended that further research be undertaken. Despite that, it appears as a comprehensive and positive business case for development of the Escarpment Mine.
[53] A first hurdle to overcome was procurement of the requisite permits to extract the coal. Whilst there was no guarantee that they would be granted, the prior payment
9 See [29] above.
of US$40 million, and the terms of the DFS, rendered that more of a business risk than a condition precedent to the trigger of the subsequent payment obligations.
[54] The parties committed to a standard form of acknowledgement that the transaction was occurring at the lowest price. Although it is to be interpreted in light of its explicit purpose of addressing financial arrangements rules in the Income Tax Act 2007, it may nonetheless be relevant:
… the Parties agree that the aggregate consideration set out in this clause 3 is the value of the Shares, and is the lowest price they would have agreed for the sale and purchase of the Shares, on the date this Agreement was entered into, if payment would have been required in full at the time the first right in the contracted property (being the Shares) was transferred.
[55] Despite the limited relevance of that provision, it is a further inconsistency with the structure that might otherwise have been expected if the consideration for the assets was US$40 million, with the prospect of L&M being paid further substantial amounts as a form of earn-out fee should Bathurst subsequently operate the business at a level reasonably in contemplation at the time of the ASP.
[56] Although it could not carry material weight as a separate consideration in deciding between the parties’ competing characterisations of the ASP, my overall reflection on the documentation is that it does not support Bathurst’s approach. It does not present as a sale of assets on terms where the first third of the consideration is to be paid on settlement, and the remaining two thirds of the potential consideration represents a shared risk between the parties for US$80 million, dependent on Bathurst’s unfettered decisions as to how the assets are to be managed and developed.
[57] To the contrary, it presents as a contract under which the latter two thirds of the quantified consideration is deferred, but will become payable at dates unknown at the time of the contract, with only limited risks that the milestones triggering the obligations for those later payments would not be achieved at all. That is certainly the case for the first performance payment.
Issue one: Meaning of “shipped” in clause 3.4 of the ASP
[58] L&M’s case is that “shipped” was used in its generic sense meaning “transported”. This meaning was the common intention of the parties according to Messrs Loudon and Bohannan when they negotiated the ASP for their respective parties. Mr Bohannan introduced the word “shipment” in Bathurst’s initial offer in December 2009. The recollections of both witnesses were clear, and demonstrated a common view on how the expression was to apply. The evidence of both principals was credible and reliable on the point.
[59] Bathurst rejected this evidence of a common intention on the basis that the evidence of parties to a contract about their subjective intentions at the time of contracting is not admissible on the issue of what the contractual term means when subsequently interpreted by the Court. However, L&M distinguished the evidence on this point from evidence of subjective intentions because of the agreement between the principals responsible for committing both parties to the ASP.
[60] L&M cited the Queen’s Bench (Commercial Court) decision in The Karen Oltmann on two points in this context.10 That case involved a charter party dispute about the scope of the charterers’ option to re-deliver the vessel “after 12 months trading”. The owners treated that option as exercisable only on the expiry of the first 12 months of the charter, whereas the charterers contended it was available to them at any time after the vessel had been chartered for 12 months. In the era when authorities such as Prenn v Simmonds imposed stricter rules against the admission of extrinsic evidence on the meaning of contractual terms,11 Kerr J held that he was entitled to consider the content of telex exchanges negotiating the terms of the charter party before it was concluded.12 The Judge looked at those telexes initially de bene esse in reliance on the owners’ characterisation of them as establishing a common understanding between the parties as to the sense in which the phrase “after 12 months trading” had been used. Once satisfied that the characterisation of the telexes contended for by the owners was accurate as a matter of first impression, the Judge
10 The Karen Oltmann, above n 6.
11 Prenn v Simmonds [1971] 1 WLR 1381 (HL).
12 The Karen Oltmann, above n 6, at 712.
relied on the telexes to corroborate the interpretation he had initially arrived at, based on the contractual wording alone.
[61] The contemporary approach to admissibility of extrinsic evidence on the meaning of terms used in a contract is substantially more liberal. However, if necessary L&M could apply an analogy with the reasoning in The Karen Oltmann to make out the admissibility of the evidence of Messrs Loudon and Bohannan to the extent that it provides a clear and consistent common understanding on the meaning the parties intended for the word “shipped”.
[62] L&M also relied on the reasoning in The Karen Oltmann to argue that a form of estoppel by convention arose. That estoppel precluded Bathurst from advancing a contrary interpretation to that which it accepted during the negotiations and for six years after completion of the contract. In The Karen Oltmann, the owners had pleaded reliance on an estoppel to the effect that the pre-charter party exchanges involved the charterers representing to the owners that the words “after 12 months” created a single opportunity on the expiry of 12 months. Although Kerr J declined to find estoppel per se due to a lack of anything amounting to a representation, his Honour did conclude:13
In these circumstances it seems to me that the charterers cannot now depart from this common meaning by asserting that this word has the opposite meaning in the charter-party.
[63] However, Tipping J in Vector Gas later described The Karen Oltmann as a case of estoppel.14
[64] No such estoppel is pleaded in this case and I would be reluctant to rely on it because of that. However, I accept the point made for L&M that there is a comparable and potentially more compelling course of conduct by Bathurst in the present case. Had the point been taken against it, that conduct could have precluded Bathurst advancing an interpretation of the word “shipped” contrary to that which Mr Bohannan maintained throughout negotiation and completion of the ASP, and to Bathurst’s conduct consistent with that for six years after its execution.
13 The Karen Oltmann, above n 6, at 713.
14 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 7, at [34]–[37].
Contractual context
[65] The parties’ different characterisations of the ASP were reflected in their different claims as to the context in which the concept of coal “shipped” from the permit areas had been used in cl 3.4. From Bathurst’s perspective, the process of preparing parts of the permit areas for open-cast coal mining was to involve a construction phase, in the course of which a quantity of coal would be extracted without it necessarily being the resource intended for production.
[66] Further, from Bathurst’s perspective, the economics of coal production in the permit areas depended on selling high quality coal for metallurgical uses which necessarily involved its export. That focus for the venture meant that, once production started, sales would be effected by shipping the coal to buyers outside New Zealand, most likely to steel mills in Asia.
[67] Those features of the ASP supported Bathurst’s interpretation of “shipped” as production coal that left the permit areas to be carried by ship to overseas buyers. On that approach, lower quality coal that was extracted during the construction phase would not count as coal “shipped” if that coal was sold domestically. Bathurst treated its sales of such coal to Holcim as fortuitous. Those sales came to an end when Holcim ceased production of cement on the west coast of the South Island in June 2016.
[68] L&M’s different perception of the character of the ASP was that the first performance payment was to become payable once the extraction of coal had been established to a meaningful extent. Coal was unlikely to be transported from the permits areas until there was a buyer for it. Until that occurred, it would be stockpiled on site. In negotiating the ASP, L&M accepted that this milestone should occur later in the process of extracting and selling coal than Bathurst had first proposed in the binding letter of intent, which provided for the first performance payment to be paid within 30 days of the earlier of the first shipment of coal after mining in the permits reached commercial production, or the date on which the first 25,000 tonnes of coal had been shipped. In the context in which it was negotiated, adoption of the latter of these two options in the ASP suggests that Bathurst’s payment obligation would be
deferred until the volume of coal reached the level of the first 25,000 tonnes to be shipped (transported) from the permit areas.
[69] Bathurst focused on the payment obligations being related to performance in terms of production from the permit areas. The heading of the clause is “Performance Payments”. Arguably, the parties agreed that the measure of performance that had to be achieved before the payment obligation was triggered was the production of a significant volume of coking or metallurgical grade coal which would inevitably be exported (that is, by ship). Bathurst would need to raise the capital to make the US$40 million payment, and to do so would have to demonstrate the viability of the export business.
[70] Bathurst argued that, at the time the ASP was entered into, the parties would not have contemplated that the measure of requisite performance would be met by the “incidental” or “fortuitous” production of that volume of lower quality thermal coal. Relevant performance was therefore to be measured by shipping the requisite quantity of higher quality coal, which inevitably would be export sales.
[71] Those arguments were different to Bathurst’s approach at the time, as described by Mr Bohannan. According to him, the measure of production was 25,000 tonnes, irrespective of the type of coal involved. Certainly, if the majority was for sale domestically, the capital raising task might be more difficult, but that was the bargain.
[72] The binding letter of intent had described these payments as “deferred cash consideration”. Arguably, over L&M’s preference to retain that description, Bathurst had insisted on changing the description to “performance payments” as was eventually used in the ASP. In closing submissions, Bathurst argued that the change in description was significant because the former treated the payments as finite existing commitments with the payment obligation delayed. In contrast, the latter description meant that the liability would not arise until certain performance measures had been met, so that if they did not occur the liability would not arise at all.
[73] I accept that Bathurst’s distinction can be drawn, but am not persuaded that it can influence the proper interpretation of the word “shipped”. The distinction reflects
the parties’ recognition at the time of the ASP that they could not predict when either the first or second performance triggers would be reached. The obligation was dependent on performance, but I am not satisfied that the nature of that performance was confined to the subset of potential production of coal for export.
[74] Bathurst supported its argument that performance is the trigger for the obligation to make the performance payment by reference to the different definition in the royalty deed for the scope of production on which royalties would be payable. The draft of the royalty deed annexed to the ASP provided that royalties would be payable on gross sales revenues, which were defined:
Gross Sales Revenues means the gross sales revenues, derived or deemed to be derived from the sale of Coal, with no deductions being made on any account (whether for mine operating costs, hedging or otherwise) and regardless of whether or not mining is profitable.
[75]Coal was defined:
Coal means coal mined from the area of any Permit part or all of which falls within the external boundaries of the Permit Areas.
[76] Bathurst submitted that there was a material difference in the language used to define the forms of production that were relevant, on the one hand, to reaching the level of coal shipped to trigger the performance payments and, on the other, to the broader concept of production from the permit areas that triggered an obligation to pay royalties. Arguably, this difference was deliberate because royalties were payable on all coal sold, whereas only coal exported (that is, “shipped”) counted for the measure of performance that would trigger the performance payment obligation.
[77] L&M explained the difference in terms between the ASP and the royalty deed on the basis that the former was a bespoke commercial deal and the latter an adaptation from standard precedents. Despite the different terminology, L&M disputed that there would be any commercial logic for adopting different modes of measurement. In both contexts, it was production from the permit areas that was relevant. Consistently with the usual structure of royalty payments, they were measured by sale prices achieved. The performance payment was triggered by a specific volume of coal once it had been transported from the permit areas.
[78] I have not found sufficient evidence in the context of the ASP and the negotiation of its terms (including the draft of the royalty deed attached as a schedule) to justify a finding that the different formulae used in defining the two payment obligations was deliberate, or intended to identify different categories of production.
[79] Bathurst also cited internal emails between L&M personnel in the period when the terms of the transaction were being negotiated to support its contention that the performance payment would only be triggered when meaningful production, enabling capital to be raised to make the payments, was occurring.
[80] The first of these was a 3 December 2009 email from Mr Gordon to Messrs Loudon and Hogan, commenting on changes he proposed at that time to the basic terms for the transaction. He stated:
Last but not least, I’ve changed the total consideration to $125m. This is mainly at the back end. If they get that far, I am sure they won’t mind paying the extra.
[81] This was a comment on changes he proposed, increasing the total consideration from US$110 million to US$125 million. At that time, his suggestion was for an initial payment of US$5 million on signing the binding letter of intent, and thereafter two US$35 million instalments, the first within 60 days of signing the ASP and the second within 30 days of obtaining the permits necessary to commence initial mining. Thereafter, a final payment of the balance was to be paid within 30 days of the shipment of the first 10,000 tonnes of coal.
[82] That proposal required a much greater proportion of the total purchase price at much earlier points in time. The different stages at which payments would be required gives a quite different complexion to Mr Gordon’s comment about Bathurst not minding paying the extra $15 million that he was adding to the total.
[83] The second email was from Mr Hogan to Messrs Loudon and Gordon on 21 December 2009, in which he commented that he thought US$40 million “is a very fair deal for us” and that he classed any additional payments as “being bonuses”. In his evidence-in-chief, Mr Hogan explained that this comment reflected his view that a US$40 million initial payment was a fair part of the total consideration to expect at
the outset. He referred to the subsequent payments as bonuses to recognise that they would depend on Bathurst’s future ability to perform with the assets being acquired. Cross-examination on the point did not change the essence of Mr Hogan’s evidence. His reference to US$40 million has to be measured against the initiative of Bathurst at the outset of negotiations in pitching its initial offer at a total consideration of US$110 million to be paid in instalments, and Mr Hogan’s agreement in cross- examination that L&M was looking to sell for more than US$40 million.
[84] Those comments by Messrs Gordon and Hogan do not help to illuminate the meaning of the word “shipped” intended by the parties at the time of the ASP.
Subsequent conduct
[85] From the time the ASP was completed until commencement of this proceeding, Bathurst conducted itself consistently with the word “shipped” equating to “transported”. Statements in Bathurst’s financial statements for the year ended 30 June 2014, and in the interim financial statements for the six months to 31 December 2014, acknowledged that domestic sales of coal to Holcim would trigger the performance payments. Thereafter, in the commentary in the 2015 annual report on the financial statements for the year ended 30 June 2015, Bathurst acknowledged that the coal being mined “has triggered the performance payments”. In the financial statements and separately in the annual report for the year ended 30 June 2016, there were similar acknowledgements that the first performance payment had been triggered by the production at the Escarpment Mine. There was a similar acknowledgement in November 2016 when Bathurst made an announcement about its acquisition of Solid Energy assets.
[86] In a June 2016 letter from Bathurst’s chief executive responding to a letter outlining L&M’s claim on the basis now pursued, there was no suggestion that the first performance payment had not been triggered. Rather, cl 3.10 was relied on to deny that non-payment amounted to a breach of Bathurst’s obligations under the ASP. I accept L&M’s submission that a denial that the performance payment had been triggered would have been included in that letter, had that been Bathurst’s interpretation of the contract at the time.
[87] After the proceeding had been commenced, the notes to the interim financial statements for the six months ended 31 December 2016 signalled a shift in the meaning attributed to “shipped” in the following terms:
Whilst in excess of 25,000 tonnes has been mined from Escarpment during construction the Company does not believe, in the legal context, that 25,000 tonnes has been shipped from the project. This would therefore not legally trigger the payment of the first performance payment.
[88] Bathurst submitted that, in the absence of some form of estoppel, it could not be held to the interpretation it had adopted at earlier times. If, as submitted for Bathurst, its previous interpretation was incorrect, then all it meant was that the outcome would be inconsistent with Bathurst’s earlier understanding. Earlier statements by Bathurst should not deflect the Court from applying the established principles of contractual interpretation by focusing on the language in its contractual context to interpret the expression as a reasonable person appraised of the circumstances of the contract would do at the time.15
[89] Bathurst placed a modicum of reliance on an email that was discovered the day before the trial began. I allowed the email to be put to witnesses over L&M’s objection at the lateness of its discovery. At a number of interlocutory stages Bathurst had been pressed to check further for discoverable documents, and its performance in doing so was the subject of criticism. Mr Bohannan sent the email in question to others within Bathurst on 5 April 2014, reporting on discussions he and the then Bathurst chairman, Mr Frow, had with Mr Loudon during a lunch meeting the previous day. Mr Bohannan reported Mr Loudon as explicitly stating that the performance payments would only fall due on the export of coal at 25,000 and one million tonnes, meaning that domestic sales would not trigger the payments.
[90] In evidence, Messrs Loudon and Bohannan recalled the lunch as a most convivial one, but neither had any recollection of the statement Mr Bohannan’s email attributed to Mr Loudon. Mr Loudon considered it most unlikely and Mr Bohannan was inclined to doubt the accuracy of the email, which did not change his overall recollection of the state of contractual commitments between the parties.
15 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 7, at [19]; and Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 8, at [60]–[63].
[91] There was no evidence of Bathurst taking any steps thereafter to confirm such a commitment from L&M, and the series of later public announcements on behalf of Bathurst was to the contrary effect because they confirmed that domestic sales of coal would count in triggering the obligation to make the first performance payment.
[92] Mr Bohannan made an announcement for Bathurst to the NZX and ASX on 29 August 2014 including:
… the current mining plan has no production activity scheduled beyond construction phase until international coking coal prices improve. Subsequently, no royalties or financial obligations linked to shipments of export coal will fall due in the foreseeable future.
[93] In closing submissions, it was submitted that the absence of protest at this characterisation of the performance payment obligations suggests acceptance by L&M of the interpretation that is now argued for Bathurst.
[94] I am not satisfied that is a valid aid for Bathurst’s interpretation. It would involve accepting that L&M was monitoring all of the public announcements by Bathurst. That is not reasonably made out. It is also inconsistent with the statements made in Bathurst’s financial statements up to that time and thereafter, which recognised the performance payment obligation consistently with L&M’s understanding.
Other usage by the parties
[95] Bathurst invited analogy with numerous references in documents mostly prepared by L&M before the transaction. In describing the scope of the potential operation at the Escarpment Mine, documents such as information memoranda prepared by L&M for marketing its assets, and valuations of those assets prepared for internal purposes, used more specific language than “shipped” if that term was to be given a generic meaning of “transported”. For instance, a June 2008 marketing document referred to coal for export being “shipped through Lyttelton”. An L&M information memorandum produced in September 2008 referred to coal being trucked from a mine, then railed to Lyttelton, for export.
[96] Bathurst argued that such references reflected usage by both parties at a more specific level than the generic usage of “shipped”. These different levels of specificity were put to Mr Bohannan in cross-examination. Mr Hodder submitted in closing submissions that Mr Bohannan’s answers illustrated that the interpretation of “shipped” contended for by L&M was strained. Mr Bohannan’s explanation was that the more specific descriptions of modes of transporting coal were appropriate in what were essentially engineering reports, whereas the measure in issue in triggering the first performance payment was the volume of production from the mine, which was a generic reference.
[97] I accept Mr Bohannan’s explanation for the different levels of specificity. I am not persuaded that the references distinguishing other modes of transport in the engineering reports and marketing documents cast doubt on the generic sense in which “shipped” had been used in the ASP.
Dictionary definitions
[98] The parties’ closing submissions urged adoption of competing dictionary definitions.
[99] Bathurst’s choice of dictionaries predictably focused on those with definitions emphasising the carriage of goods by sea. The primary meaning of the word “shipped” in the New Zealand Oxford Dictionary was cited as:16
… put, take or send away (goods, passengers, sailors, etc) on board ship.
[100] Further meanings from that source acknowledged wider usage in certain contexts, including reference to American usage of “ship” as including an aircraft. Bathurst noted this wider definition is reflected in some New Zealand statutes.17
16 Tony Deverson and Graeme Kennedy (eds) The New Zealand Oxford Dictionary (Oxford University Press, Auckland, 2005).
17 For example, the Tariff Act 1988; and Customs and Excise Act 1996.
[101] L&M cited definitions where a primary meaning of “to transport … on board a ship” was supplemented with “to transport … by another means, such as by road or rail”,18 or separately “by mail”.19
[102] From all the references cited, it is clear that the word “shipped” is used in a wide range of contexts, which can reflect both specific and broad meanings. The meaning appropriately attributed to it will depend on context. Unless the context signals to the reader that passage of goods by sea is contemplated, without more it is not appropriate to confine its interpretation to transport on board a sea-going vessel. The context here is the transport of a bulk cargo from a land-locked area on the west coast of the South Island. Coal could never be “shipped” in the narrow sense from the boundaries of the permit areas. On the other hand, if the buyer of the coal was outside New Zealand, carriage for the sea leg of its delivery to the buyer would inevitably be by ship.
[15] A subset of the passages in the witness statements objected to are statements about whether the parties addressed the intended meaning of the expression “shipped” in describing production from the mine that would trigger the obligation to make performance payments. The meaning of that expression is important to the substantive dispute. This raises the prospect of there being what Tipping J has called a “private dictionary meaning”, namely a specific meaning particular to the parties that is not consistent with the natural or ordinary meaning of the expression.8 Mr Kalderimis characterised the references to whether there was a special meaning to be attributed to “shipped” as being necessary in L&M’s witness statements to meet any evidence from Bathurst witnesses asserting that to be the case. Given the likely scope of the issue, there is potential relevance to L&M’s witnesses addressing the absence of any dialogue between the parties during negotiations or agreement on a private dictionary meaning.
[16] It was not realistic to undertake a point by point analysis of the extent of commonality between Mr Bohannan and the remaining L&M witnesses (in their recollections of the parties’ positions) to test Mr Kalderimis’s contention that the evidence from representatives of both sides negotiating the contract reflected a shared view. I took the view that the preferable course was to allow the evidence as recorded in the witness statements, de bene esse. This is subject to the exclusion of any views about the meaning or effect of the contract expressed by one or more witnesses describing the L&M perspective where, after the evidence has been tested, they do not reflect what is established as the objective shared intention of both parties. As always, there will be assessments of the weight to be given to evidence that I ultimately find to be admissible, and the ability to disregard evidence that is not a legitimate aid to interpretation of the contract.
8 Vector Gas Ltd, above n 3, at [25]–[26].
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