LMCHB Ltd v Buller Coal Ltd
[2023] NZHC 633
•27 March 2023
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2021-485-524
[2023] NZHC 633
UNDER the Declaratory Judgments Act 1908 BETWEEN
LMCHB LIMITED (formerly L&M Coal Holdings Limited)
Plaintiff
AND
BULLER COAL LIMITED
First Defendant
BATHURST RESOURCES LIMITED
Second Defendant
Hearing: 20-21 June 2022 Appearances:
J B M Smith KC, M C Smith and H E McQueen for Plaintiff J E Hodder KC, R J Gordon and A S Kirk for Defendants
Judgment:
27 March 2023
Re-issued:
29 March 2023
JUDGMENT OF ISAC J
LMCHB LTD v BULLER COAL LTD [2023] NZHC 633 [29 March 2023]
TABLE OF CONTENTS
Introduction [1]
Background [7]
The Supreme Court’s decision [19]
The hearing and issues [26]
What was the effect of cl 3.10 on the Deed of Guarantee? [29]
Relevant contractual documents
The Agreement [32]
The Royalty Deed [38]
The Deed of Guarantee [40]
The Amendment Deed [46]
The parties’ arguments [50]
L&M’s position [51]
Buller Coal’s position [53]
Principles of contract interpretation and the admissibility of extrinsic
evidence [57]Whole contract approach and interpretation of related contractual
instruments [59]
Consideration [67]
Is the first performance payment due under the Deed of Guarantee? [80]
The parties’ arguments
L&M’s position [81]
Buller Coal’s position [88]
Consideration [93]
The law of guarantees and the nature of liability of a guarantor [94] The terms of the Deed of Guarantee and the Agreement for Sale and
Purchase [97]
The effect of the Supreme Court’s judgment in the context of this case [109]
Do the Contract and Commercial Law Act or an implied term permit
Buller Coal to rely on cl 3.10? [111]
Is L&M’s promise in cl 3.10 enforceable by Buller Coal under s 12? [112]
An implied term? [117]
Does a Henderson v Henderson abuse arise? [121]
Legal principles [123]
The parties’ arguments [127]
Consideration [135]
Remaining procedural issues [151]
L&M’s challenges to the admissibility of evidence [152]
The use of the declaratory judgments procedure [154]
Conclusion and result [156]
Costs [158]
Post-script [159]
Introduction
[1] In 2021 the Supreme Court found that the plaintiff, L&M, 1 was not yet entitled to a USD 40 million performance payment from the second defendant, Bathurst, under an agreement for the sale of coal mining interests.2 The Court found that although a contractual threshold for the performance payment had been reached, an amendment to the sale agreement meant that Bathurst was entitled to postpone the payment as long as royalties due to L&M were paid in accordance with a separate royalty deed. As royalties continued to be paid as required, the Supreme Court found that Bathurst was not yet liable to make the performance payment.
[2] Undeterred, in this second proceeding L&M applies for a declaration that it is entitled to exercise security rights in relation to the performance payment. It argues the Supreme Court’s judgment only determined Bathurst’s liability under the agreement for sale and purchase. In this new proceeding L&M pursues Bathurst’s subsidiary, Buller Coal (the first defendant) in relation to the same USD 40 million. L&M argues it is permitted to do so under a separate guarantee of Bathurst’s obligations provided to it by Buller Coal.
[3] The case gives rise to three issues. The first is whether the amendment to the agreement for sale and purchase central to the Supreme Court’s decision also modified Buller Coal’s guarantee. Buller Coal says that must be the case to make commercial sense of the agreements and to give effect to the Supreme Court’s judgment. L&M says the sale agreement and the guarantee are quite different contracts involving different parties, and the amendment was clearly limited to the agreement. As the Supreme Court did not consider L&M’s rights under the guarantee, it is now free to pursue the present claim.
1 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 [SC judgment]. See too David McLauchlan “The lottery of contract interpretation” [2021] NZLJ 256, [2021] NZLJ 295; and Pita Roycroft and Bridget McLay “A new leading authority on contract interpretation — Bathurst Resources Ltd v L & M Coal Holdings Ltd” [2021] NZLJ 287.
2 The plaintiff company in this proceeding is LMCHB Ltd, formerly named L&M Coal Holdings Ltd, the plaintiff in the former proceedings. In the interests of consistency, in this judgment I have adopted the party names used in the Supreme Court’s judgment.
[4] The second question concerns the proper characterisation and effect of the Supreme Court’s decision. L&M argues that, properly understood, the Supreme Court’s judgment means that the performance payment is now due, but enforcement of the debt against Bathurst has merely been postponed. It follows that Buller Coal’s liability under the guarantee has also crystallised and may now be enforced by L&M under its security. In response, Buller Coal argues that a debt without an existing repayment requirement is not “due” for the purposes of the guarantee. The amendment resulted in an indulgence that provided Bathurst with the option to defer the performance payment provided it continued to pay the appropriate royalties. As it has done so, the effect of the Supreme Court’s decision means there is no default against which the guarantee can bite.
[5] The final issue is whether L&M’s decision not to raise the questions in this proceeding in the previous litigation amounts to an abuse of process. L&M says that like any creditor holding a guarantee it was free to pursue the principal debtor— Bathurst—before pursuing the guarantor. In response, Bathurst contends that this proceeding rests squarely within the scope of litigation conduct giving rise to an abuse of process under the rule in Henderson v Henderson, and as such L&M should now be prevented from pursuing this new claim.
[6]Who then is right?
Background
[7] The Supreme Court’s judgment sets out much of the relevant background and what follows is largely drawn from it.3
[8] Prior to 2010, L&M held two coal exploration permits over parts of the Denniston and Stockton Plateaus situated on the West Coast of the South Island. The permits were held through L&M’s subsidiary, Buller Coal, the first defendant in this proceeding and a party to the previous Supreme Court proceedings.
3 SC judgment, above n 1, at [5]–[7], [11]–[30], [159]–[162], [189]–[190] and [197]–[198] per
Winkelmann CJ and Ellen France J; and [234]–[238] and [240]–[247] per O’Regan J.
[9] An area on the Denniston Plateau, known as Escarpment, was seen as the most attractive opportunity for coal extraction. It contained a significant volume of high quality coking coal, which is commonly used to make steel. At the trial before the High Court in 2018, the evidence indicated that L&M’s costs to acquire the exploration permits had been approximately $400,000, and the total project costs incurred were in the order of $5–10 million.
[10] By 2008, L&M was seeking to develop the coal resource with a partner or sell the development prospects to others. In 2009 discussions began between representatives of L&M and Bathurst about a potential sale of the assets. By December 2009, Bathurst had made a formal offer and in February 2010, a binding letter of intent was signed. Then on 10 June 2010, a conditional agreement for sale and purchase was executed (the Agreement). The transaction took the form of a sale of the shares in L&M’s subsidiary which held the mining assets, Buller Coal. The assets included the two exploration permits and the rights associated with them, and an outstanding application for a mining permit for Escarpment. Before commercial sale of the mining assets could be realised, significant hurdles remained to be overcome, including obtaining the necessary resource consents and concessions.4 No doubt for these reasons, the Agreement was conditional on Bathurst’s receipt of an acceptable feasibility study of the permit areas.
[11] I will return later to address the form and content of the series of contracts that the Agreement gave rise to. For now, it is enough to record that the consideration for the shares involved a staggered payment of cash, performance shares and royalties derived from shipped coal. The total potential cash payment under the Agreement was USD 120 million made up of:5
(a)a deposit of USD 5 million payable on the agreement for sale and purchase becoming unconditional;
4 The mining permit for Escarpment was granted shortly after the Agreement was entered into, on 24 June 2010.
5 Clause 3.4(a) and (b) of the Agreement.
(b)a further USD 35 million payable on settlement, referred to in the Agreement as the “Settlement Cash Consideration”; and
(c)two further “performance payments”—each of USD 40 million—the first payable 30 days after 25,000 tonnes of coal was shipped from the permit areas; and the second payable 30 days after one million tonnes of coals had been shipped.
[12] Of these payments, USD 40 million represented guaranteed cash-in-hand for L&M. The remaining USD 80 million was contingent on the successful commercialisation of the permits, and the ongoing operation of the mine as a going concern.
[13] In addition to these payments, Bathurst was also required to pay ongoing royalty payments to L&M based on a percentage value of gross coal sales.
[14] Finally, Bathurst was to issue L&M with performance shares amounting to five per cent of the post-issue share capital of Bathurst when the second performance payment fell due or if Bathurst received notice of an offer from a third party to acquire more than 50 per cent of its shares (whichever might occur first). Failure to issue the performance shares accordingly would result in a two per cent increase in the royalty rate in lieu of the issue of shares.
[15] The agreement became unconditional and settled in November 2010 with the payment of the USD 35 million Settlement Cash Consideration. Bathurst needed to raise substantial amounts of capital to develop the mine and meet its payment obligations under the Agreement. Although initially successful with that capital raising, it took longer than projected to obtain the necessary resource consents. This substantially delayed the start of the mining operation, and during that time the international price of coking coal collapsed; by 2016 the price per tonne had dropped to less than one quarter of its mid-2011 value.
[16] Even as the international coal market began to decline, the parties enjoyed a constructive and cooperative relationship. Bathurst continued work towards being able to exploit the rights it had purchased, and L&M was accommodating in its approach to enforcing its contractual rights in order to assist Bathurst develop the project into a viable operation. This led in August 2012 to a third deed amending the agreement for sale and purchase (Amendment Deed).6 The Amendment Deed addressed whether Bathurst would be in breach of contract if it failed to pay the first performance payment after it had shipped 25,000 tonnes of coal but continued to pay royalties at the initial level. One clause in particular, cl 3.10, provided:
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.
[17] It was not until November 2013 that the resource consents needed for the Escarpment mine were obtained, but Bathurst was still without the necessary access rights to the land (which had to be obtained from the Department of Conservation).7 In February 2014 Bathurst announced it would undertake only limited mining of coking coal. As the price of coking coal continued to decline between September 2014, when the first coal was recovered from Escarpment, and early 2016, Bathurst continued to pay the royalty payments on the coal that was sold which meant that, in terms of cl 3.10, it could delay making the first performance payment. Then in May 2016, Bathurst suspended mining operations at Escarpment altogether. Its commercial focus had moved to different coal mining ventures. Its business plan contemplated exploitation of its alternative mining interests before a resumption of mining at Escarpment. In the meantime, from September 2016 there was a substantial recovery of coking coal prices.
6 The Supreme Court referred to this document as the ‘Third Deed”.
7 Buller Coal finally obtained the necessary access arrangements for Escarpment in June 2014.
[18] Perhaps unsurprisingly, the constructive relationship between the parties broke down. Following several years of litigation, the Supreme Court reversed decisions of the High Court8 and Court of Appeal9 which found Bathurst liable to pay the first performance payment. The focus in the following summary of the Supreme Court’s decision is on those issues relevant to the current proceeding.
The Supreme Court’s decision
[19] Delivering the judgment of the majority, O’Regan J found that cl 3.10 of the Amendment Deed contained a concession by L&M.10 Without it, Bathurst faced a potential “catch-22” situation where the first contractual threshold—shipping of 25,000 tonnes of coal from the mine—had been reached but with revenues insufficient to raise the capital necessary to fund the performance payment. Clause 3.10 was designed “to provide a way out of that catch-22”:11
In essence, L&M was agreeing not to enforce payment of the performance payments in circumstances where Bathurst (through Buller Coal) would not have generated enough revenue from the mine to fund the payment and would not be able to raise capital because of its impending default or actual default in making the first performance payment. It was not in L&M’s interest to hold Bathurst in that position, which is why the concession in cl 3.10 was made.
[20] And, importantly, the agreement for sale and purchase did not impose an obligation on Bathurst to ensure a minimum level of production, or indeed to continue with the mining operation:12
There was nothing in any of the relevant agreements that placed any fetter on Bathurst entering into other business opportunities in New Zealand or elsewhere, and nothing that required Bathurst to favour the development of a mine in the permit areas over any alternative business in which it may have become involved. The risk assumed by L&M that the mine would never be fully developed and exploited included the risk that Bathurst would see a better use for its capital elsewhere, whether that was a few kilometres away from the mine or on the other side of the world. L&M knew Bathurst was an international coal mine investor. By the time the Third Deed was signed, L&M would have known that Bathurst had purchased Whareatea West permit and the Coalbrookdale permits in 2011. Bathurst did not make any commitment to prefer the permit areas above any other potential investment that became
8 L&M Coal Holdings Ltd v Bathurst Resources Ltd [2018] NZHC 2127, [2020] NZCCLR 11.
9 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2020] NZCA 113, [2021] 3 NZLR 765.
10 SC judgment, above n 1, at [238] and [241]–[242], Glazebrook and Williams JJ concurring.
11 At [240]–[241].
12 At [247].
available to it, and there was nothing restraining Bathurst from further purchases in the vicinity of the permit areas.
[21] The Court found that under cl 3.10, L&M agreed that if Bathurst did not pay a performance payment when due, that would not be an actionable breach “for so long as the relevant royalty payments continue to be made under the Royalty Deed”.13 There was an assumption by the drafter of cl 3.10 that despite non-payment of the performance payment, mining would continue, and the relevant royalty payments would continue to be made “when and as due”. But no new obligation was imposed to make royalty payments. The only royalties required to be made remained those which Buller Coal had undertaken to pay under the royalty deed. This led the majority to conclude that:14
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.
[22] The Court observed that there was always a chance that the royalty payment stream could be interrupted by an accident or if, as occurred, the mine became uneconomic. So the expression “continue to be made” in cl 3.10 had to have contemplated an element of conditionality. It followed that L&M’s agreement to accept “elevated” royalty payments as compensation for late payment of the performance payment:15
… 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.
[23] In a dissenting judgment, Winkelmann CJ and Ellen France J considered that the interpretation of cl 3.10 advanced by Bathurst, if correct, meant that it neither had to pay the performance payment nor any royalties because it was not mining Escarpment and, possibly, might never do so.16 In their view, cl 3.10 provided Bathurst
13 At [248].
14 At [249].
15 At [252].
16 At [163].
with an indulgence, conditional on maintaining payments of the relevant royalties.17 The minority agreed with the Court of Appeal that the relevant royalty payments were those arising from a level of mining “consistent with that which triggered the performance payment”.18 This interpretation was supported by the context as reflected in the High Court’s factual findings, and in particular that Bathurst’s concern leading to the Amendment Deed was to avoid “having to announce [to the stock market] that it found itself in breach if it was unable to make the payment immediately upon coming due”.19
[24] Shortly after the Supreme Court’s judgment, L&M made a renewed demand, arguing that the Court’s decision confirmed that Bathurst’s obligation to pay the first performance payment under the Agreement been triggered. It said:
In so ruling, all five judges of the Supreme Court agreed that [Bathurst] owes [L&M] a debt of US$40m (the Debt), affirming the judgments of the unanimous Court of Appeal and the High Court below. All nine judges agreed the Debt has become due.
…
The effect of the Supreme Court’s judgment is that, despite the Debt becoming due, cl 3.10 of the [Agreement] operates so that [L&M] is presently unable to exercise its contractual remedies under the [Agreement] against [Bathurst].
As you are aware, [Buller Coal] guarantees and indemnifies Bathurst’s obligations under the [Agreement] in the separate [Deed of Guarantee]. Clause
3.10 of the [Agreement], as introduced by the [Amendment Deed] to the [Agreement], and to which [Buller Coal] is not a party, does not restrict [L&M] from exercising its self-help security rights under the [Deed of Guarantee].
[25] It follows from this brief outline that while the central issue in the Supreme Court was the effect of the Amendment Deed on the Agreement, the issue in this proceeding is the effect, if any, of the amendment on the Deed of Guarantee and Security (Deed of Guarantee).
17 At [174].
18 At [174].
19 At [182], citing the High Court judgment, above n 8, at [116] and [122].
The hearing and issues
[26]The following issues arose at the hearing:
(a)What was the effect of cl 3.10 on the Deed of Guarantee, if any?
(b)Is the first performance payment due under the Deed of Guarantee?
(c)Do s 12 of the Contract and Commercial Law Act 2017, or an implied term, permit Buller Coal to rely on the suspensory effect of cl 3.10?
(d)Does a Henderson v Henderson estoppel prevent L&M from pursuing its claim?
[27] In addition to these issues, L&M objected to large parts of Bathurst’s evidence on the basis that it was irrelevant, hearsay, or inadmissible opinion. In response, Bathurst is critical of L&M’s use of the Declaratory Judgments Act 1908 in a claim which, it says, involves a mixture of fact and law, and that is unsuited to the truncated procedure. Given the way I have approached the issues it is unnecessary to address these procedural points in detail.
[28] In the lead-up to the hearing the parties also narrowed their positions. First, L&M did not pursue an earlier cause of action based on an alleged non-monetary breach of cl 9.1(b) of the Deed of Guarantee. Second, Bathurst did not pursue its first affirmative defence based on res judicata and issue estoppel.
What was the effect of cl 3.10 on the Deed of Guarantee?
[29] The first issue is the effect of cl 3.10 on the Deed of Guarantee, if any. If the suspensory effect of cl 3.10 applies to the guarantee, L&M’s claim under the guarantee is unsustainable because its rights under that document are subject to the same limitations as the Agreement.
[30] Before turning to outline the parties’ arguments, it is helpful to start with an outline of the related agreements and their relevant provisions. In this case, counsel’s submissions focussed on the following contracts:
(a)the Agreement (entitled “Agreement for Sale and Purchase of Shares in [Buller Coal]”), signed on 10 June 2010;
(b)the Royalty Deed (entitled “Deed of Royalty”), signed on 6 August 2010;
(c)the First Amendment Deed (entitled “Deed of Amendment to Buller Sale and Purchase Agreement and Royalty Deed”), signed on 17 September 2010.
(d)the Second Amendment Deed (entitled “Deed of Amendment No. 2 to Buller Sale and Purchase Agreement and Royalty Deed”), signed on 29 October 2010;
(e)the Deed of Guarantee (entitled “Deed of Guarantee and Security”), signed on 9 November 2010, once the Agreement became unconditional;
(f)the Amendment Deed (entitled “Deed of Amendment No. 3 to Buller Sale and Purchase Agreement”), signed on 21 August 2012, inserting a new cl 3.10 into the Agreement; and
(g)a Deed of Novation and Amendment, entered into on 7 June 2013, under which the original Bathurst party to the Agreement was replaced with the entity which is now the party to the current proceeding.20
[31] Of these documents, the Agreement, Deed of Royalty, Deed of Guarantee, and Amendment Deed were the primary focus. I begin with them.
20 As with the Supreme Court’s decision (at fn 13), nothing turns on the identity of the original contracting party, although both parties made reference to it in their submissions.
Relevant contractual documents
The Agreement
[32] The Agreement is the primary contract and sets out the overall framework for the transaction. Signed on 10 June 2010, there were only two parties to it: L&M and Bathurst. Settlement of the sale of the shares in Buller Coal was subject to a number of conditions inserted into the Agreement for Bathurst’s sole benefit.21 They included Bathurst obtaining various consents under the Overseas Investment Act 2005, the Crown Minerals Act 1991, as well as a “definitive feasibility study being completed to Bathurst’s reasonable satisfaction”.22 The feasibility study was defined to mean a study to be undertaken in relation to the Escarpment by a nominated mining consultancy firm, Marston & Marston, by 31 July 2010.23 If any of the conditions were not satisfied or waived by the relevant date, the Agreement was voidable at the election of either party.24 If the Agreement became void or was otherwise terminated neither party had any rights against or obligations to the other “except for accrued rights or remedies”.25
[33] It follows that a binding agreement for the sale and purchase of Buller’s shares only came into existence on the satisfactory completion of the conditions. Only if the Agreement became unconditional did it require Bathurst to deliver to L&M a duly executed Royalty Deed and, separately, the Deed of Guarantee.26 Both deeds were defined in the Agreement as follows:27
Guarantee and Security Deed means a deed under which the Company [Buller Coal] will guarantee certain obligations of the Purchaser [Bathurst] under this Agreement and grant a security interest in favour of the Vendor [L&M], in or substantially in the form set out in Schedule 3
Royalty Deed means the deed of royalty to be entered into between the Parties at Settlement, in or substantially in the form set out in Schedule 2
21 Agreement for Sale and Purchase, cls 4.1 and 4.2.
22 Clause 4.1.
23 Clauses 1.1 and 6.6.
24 Clause 5.4.
25 Clause 5.5(a).
26 Clauses 7.2 and 7.3(b). It appears that the Royalty Deed was signed well in advance of the Agreement becoming unconditional and settlement of the purchase on 9 November 2010, but nothing turns on this.
27 Clause 1.1.
[34] Schedules 2 and 3 of the Agreement then set out the proposed terms of the two deeds. Given the above definitions, the parties had contracted to sign both “in or substantially in the form set out” in the schedules. And, critical to Bathurst’s argument in this case, the term “Agreement” itself was defined in cl 1.1 as follows:
Agreement means this agreement, and includes the Background, Schedules and Appendices.
[35] As I have noted already, the consideration for the mining rights was carefully structured. The relevant clause—cl 3.4—was in these terms:
Performance Payments
The Purchaser shall pay the Vendor or its nominee, to such bank account as the Vendor may direct in writing at least 5 Business Days before payment is due to be made:
(a)US$40,000,000 within 30 days of the date on which the first 25,000 tonnes of coal has been shipped from the Permit Areas; and
(b)US$40,000,000 within 30 days of the date on which the first one million tonnes of coal has been shipped from the Permit Areas,
and the Purchaser shall immediately notify the Vendor of the occurrence of any event which gives rise to an obligation on the Purchaser to make a payment to the Vendor under this clause 3.4.
[36] Clause 9 of the Agreement governed rights in the event of default. Clause 9.3 provided that if the defaulting party did not comply with the terms of a settlement notice, the non-defaulting party could:
(a)sue the defaulting Party for specific performance; and/or
(b)cancel the Agreement; and/or
(c)sue the defaulting party for damages.
[37] Clause 9.7 then provided that these rights, aside from the right to cancel, were also available in the event of non-payment of performance payments.
The Royalty Deed
[38] In addition to the cash consideration sums, Bathurst was required by the Agreement to pay an ongoing royalty on gross sales revenues in accordance with the Royalty Deed.28 As the mining was carried out by Buller Coal, the primary obligation to make the royalty payments belonged to Buller Coal.29 Bathurst in turn “unconditionally and irrevocably” guaranteed the performance of Buller Coal’s obligation.30
[39] The Royalty Deed provided that royalties on all coal sales were initially to be paid at the rate of 10 per cent of gross sales revenues, but the level payable dropped 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.31
The Deed of Guarantee
[40] As noted, the Agreement required Bathurst to provide an executed Deed of Guarantee on settlement in substantially the same form as that set out in Schedule 3. The document eventually signed by the parties on 9 November 2010 was in all material respects in identical terms to that set out in the schedule.32 Consistent with the Royalty Deed, the parties were again Buller Coal and Bathurst on the one hand, and L&M on the other.
[41] The operative provisions of the guarantee provided that Buller Coal “absolutely, unconditionally and irrevocably” guaranteed to L&M the due and punctual payment by Bathurst of “the Guaranteed Money”.33 That term was defined as “all amounts owing by Bathurst to [L&M] in accordance with cl 3.4 of the [Agreement]”. In other words, the Guaranteed Money included the two performance
28 Clause 3.1(e) of the Agreement provided that the “aggregate consideration” included the deposit, the settlement cash consideration, the performance payments, performance shares and “the royalty payable by [Buller Coal] to [L&M] under and in accordance with the Royalty Deed”.
29 SC judgment, above n 1, at [13] and [15].
30 Royalty Deed, cl 12.1.
31 Clause 4.1(a)–(c).
32 The changes principally related to the inclusion of details such as the date of the Deed, relevant addresses or contact details for the parties or their officers, and service. In addition, the words “of the Royalty Deed” were added to the definition of “secured money”, which is unsurprising, given the balance of the definition clearly refers to provisions of the Royalty Deed.
33 Clause 2.1.
payments required of Bathurst on shipping the prescribed tonnages of coal from the permit areas.
[42] In addition, Buller Coal undertook that if Bathurst did not pay any of the Guaranteed Money “when due”, Buller would pay that sum “immediately on demand”.34 Buller Coal also provided L&M with an indemnity in relation to any losses it might incur as a result of the Guaranteed Money not being paid by Bathurst for any reason.35
[43] The Deed of Guarantee also contained an anti-discharge provision. L&M relies on the anti-discharge provision to support its argument that the Amendment Deed did not affect its rights under the Deed of Guarantee. Given that, it is useful to set out the relevant part of the provision:
3NATURE AND EXTENT OF OBLIGATIONS
3.1Liability not prejudiced
The Guarantor [Buller Coal] will not be discharged, nor will any of its obligations be affected (nor will any of the rights of the Secured Creditor [L&M] be affected), by anything which, but for this clause, might operate to discharge or affect the obligations of, or otherwise provide a defence to, the Guarantor (whether or not known to the Guarantor or the Secured Creditor), including:
(a)any further credit, advance or accommodation made or given by the Secured Creditor to, or at the request of, the Guarantor or Bathurst;
(b)any amendment to or variation of (however fundamental) any other agreement, guarantee or security, or any of the rights of the Secured Creditor against the Guarantor, Bathurst or any other person;
(c)any time, credit, waiver, indulgence or other concession given to, or arrangement made with, the Guarantor, Bathurst or any other person;
(d)the non-existence, avoidance, invalidity or unenforceability of, or any release or discharge (in whole or part) of, the Guarantor, Bathurst or any other person from, or any failure by any person to execute or be, bound by, any other agreement, guarantee or security;
34 Clause 2.2.
35 Clause 2.3.
(e)any enforcement of, delay in enforcing or failure to enforce:
(i)any rights of the Secured Creditor against the Guarantor, Bathurst or any other person; or
(ii)any other agreement, guarantee or security in respect of any Guaranteed Money;
(f)any moratorium…
(i)in respect of the payment of the Guaranteed Money…
…
(i)anything done, or omitted or neglected to be done, by the Secured Creditor, whether in exercise of the rights of the Secured Creditor under this deed or any other agreement, guarantee or security, or otherwise; or
(j)any other thing whatever, other than a release of the obligations of the Guarantor under this deed executed by the Secured Creditor.
(emphasis added)
[44] Part 3 of the Deed of Guarantee granted L&M a security interest over Buller Coal’s “Secured Property”, which included all of Buller’s present and future assets.36 In addition:
(a)under cl 5.2, L&M is permitted to enforce its rights against Buller Coal without first taking steps against Bathurst;
(b)clause 9.1 outlined relevant events of default, including the non-payment of any of the Secured Money by Buller Coal on its due date; and
(c)under cl 9.2, upon an event of default the security created by the Deed becomes immediately enforceable, and L&M may “exercise all or any rights which a person would have if appointed as a Receiver under this deed”.
36 Clauses 4.1 and 1.1.
[45]Finally, the Deed of Guarantee provided:
16.8 Amendments
No amendment to this deed will be effective unless it is in writing and signed by all parties to this deed.
The Amendment Deed
[46] In contrast to the two previous deeds of amendment, Buller Coal was not a party to the Amendment Deed. And unlike the previous amendment deeds, the Amendment Deed was also ostensibly limited in its effect to the Agreement.37
[47] As the Supreme Court observed, the Amendment 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”.38 The critical feature of the document was the inclusion of a new cl 3.10 in the Agreement as follows:39
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.
[48] The effect of cl 3.10 meant that until it paid the first performance payment, Bathurst was required to pay royalties at the rate of 10 per cent on gross sales revenues, rather than five per cent.
[49] By cl 3 of Amendment Deed, the parties to the deed recorded that nothing in it constituted a waiver by L&M of its rights under cl 9.7 of the Agreement (relating to non-payment of the performance payments) “so long as payments are made in accordance with the Royalty Deed”. And by cl 4, Bathurst and L&M confirmed,
37 The first and second deeds of amendment expressly made amendments to both the Agreement and the Royalty Deed.
38 At [24].
39 It is common ground that while the Amendment Deed refers to the insertion of a “new” cl 3.9, that was a drafting error which should have read cl 3.10 because the First Amendment Deed had already inserted a new cl 3.9.
except to the extent amended by the Amendment Deed, that the Agreement would “otherwise remain in full force and effect”.
The parties’ arguments
[50] At the heart of the parties’ differences on this issue is the basic proposition that L&M is seeking to take with one hand what it gave with the other: the concession it provided to Bathurst under the Amendment Deed does not affect Buller Coal’s liability under the Deed of Guarantee to pay the USD 40 million performance payment.
L&M’s position
[51] Mr Smith KC for L&M accepted that the Amendment Deed granted Bathurst a concession. Although the first performance payment had fallen due, cl 3.10’s effect is that the vendor will not treat non-payment as a breach of the Agreement. However, the concession relates to enforcement of the debt under the Agreement, not whether the debt is due and separately enforceable against Buller Coal under the Deed of Guarantee.
[52] In support of the argument that the Amendment Deed did not affect Buller Coal’s liability under the Deed of Guarantee, L&M points to the following:
(a)The Amendment Deed does not purport to amend the Deed of Guarantee. In contrast, the first and second amendment deeds expressly refer to amendments to contracts beyond the Agreement, for instance the Royalty Deed. So where the parties intended to amend more than one of the contracts they expressly did so.
(b)Buller Coal is not a party to the Amendment Deed. This reflects the fact that only L&M and Bathurst are parties to the Agreement, and the Amendment Deed only purports to amend the Agreement. The obvious inference is that the parties did not see any need for Buller Coal to be a party to the Amendment Deed because it did not amend any of Buller Coal’s obligations, or amend any contract to which Buller Coal was a party.
(c)The recitals to the Amendment Deed and the body of the document refer only to the Agreement. There is no mention of the Deed of Guarantee.
(d)Turning to business common sense, Mr Smith implicitly accepted the inconsistency created by his client’s argument between Bathurst’s obligations under the Agreement on the one hand and Buller Coal’s obligations under the Deed of Guarantee on the other. However, he pointed to the conclusion of the majority in the Supreme Court which, in his submission, stands for the proposition that where experienced commercial parties do not stipulate for outcomes it is not appropriate for the Court to assume that the “missing” outcome is a problem in search of a solution. L&M contends that—consistent with the Supreme Court’s approach—these were sophisticated commercial parties who were advised by experienced lawyers who took care in their approach to amendments to the suite of related contracts.40
Buller Coal’s position
[53] For Bathurst and Buller Coal, Mr Hodder KC submitted that the Deed of Guarantee was part of the Agreement as defined in (and amended by) the Amendment Deed. This interpretive argument rests on the proposition that the definition of “Agreement” in cl 1.1 of the Agreement expressly includes the schedules, which in turn included the agreed form of the Royalty Deed—and more importantly—the Deed of Guarantee. Both are said to form part of the Agreement. In this way, the Deed of Guarantee was expressly made part of the Agreement.41 Further, the inclusive
40 In substance, L&M contended that the failure of the parties to vary the Deed of Guarantee to reflect the change made to the Agreement by the Amendment Deed is, on an objective approach, an example of “studied ambiguity”. Bathurst and Buller Coal may have considered that they had obtained a “splendid concession” in the Amendment Deed, and deliberately kept silent about their desire to suspend mining. Equally, L&M, faced with the prospect of the need to make a concession in order to facilitate Bathurst’s capital raising requirements, may have deliberately remained silent on its rights under the Deed of Guarantee. There is no lack of commercial sense and no absurdity in commercial parties acting in this way.
41 That conclusion is reinforced by the definition of “transaction” in cl 1.1 of the Agreement: “the transaction provided for in this Agreement, being the sale of the Shares by the Vendor to the Purchaser and the associated royalty, guarantee and security arrangements” (emphasis added).
definition of “Agreement” extended to include the three deeds of amendment, as confirmed by recital A of the Deed of Novation.
[54] Clause 1 of the Amendment Deed (“Definitions and Construction”) states that all capitalised terms within the deed are to have the same meaning accorded to them in the Agreement itself, unless expressly provided for otherwise. Therefore, the term “Agreement” as it is used in the Amendment Deed is the same “Agreement” as is defined in cl 1.1 of the Agreement. This makes sense because the Amendment Deed was inserting a new agreed clause into the Agreement. It follows, according to the argument, that the Amendment Deed amended not only the Agreement but also the Deed of Guarantee.
[55] Mr Hodder argued that applying the term “Agreement” (from cl 1.1 of the Agreement) to the new cl 3.10 “is simple but very clear”:
Failure to make Performance Payments
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.
(emphasis added)
[56] It follows that by what it “freely signed up to” in the Amendment Deed, L&M was agreeing that a failure by Bathurst to make a performance payment when it otherwise was due would not be an actionable breach of or default under the Agreement, the Royalty Deed or the Deed of Guarantee.
Principles of contract interpretation and the admissibility of extrinsic evidence
[57] The arguments for both parties principally focussed on two aspects of contract interpretation: the “plain meaning” derived from the text of the relevant contracts themselves and their commercial purpose. While both parties pointed to matters of background and context to emphasise particular commercial outcomes and intentions, this was not a case where extrinsic materials were relied on by either side to suggest a contractual outcome at odds with the text of the contracts themselves. The real
question of law relates to the relationship of the various contracts with each other and their effect on the bargain as a whole.
[58] It follows that only a brief summary of the relevant principles is necessary. The leading authorities in this country on the approach to contractual interpretation, and the admissibility of extrinsic evidence going to the common contractual intention, are the Supreme Court’s decisions in Firm PI 1 Ltd v Zurich Australian Insurance Ltd and Bathurst Resources Ltd v L&M Coal Holdings Ltd,42 and the Court of Appeal’s recent decision in Napier City Council v Local Government Mutual Funds.43 The relevant principles are:
(a)The proper approach to interpretation of a contract is objective, 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.44 This is known as a contextual or purposive approach to contract interpretation. It is not dependent on ambiguity in the contractual language.45
(b)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. Thus if the language of the clause in issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful but not conclusive indicator of what the parties meant.46
(c)When interpreting commercial contracts, the courts should have regard to their commercial purpose and the structure of the parties’ bargain, to the extent they can be reliably identified.47
42 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432; and SC judgment, above n 1.
43 Napier City Council v Local Government Mutual Funds [2022] NZCA 422, [2022] 3 NZLR 528.
44 Firm PI 1, above n 42, at [60].
45 At [61].
46 At [63].
47 At [78]–[79].
(d)While a court may attribute a different intention to words in a contract where the background (or “business common sense”) suggests that something has gone wrong with the language,48 it should only conclude that the words’ ordinary and natural meaning produce a commercially absurd result in the most obvious and extreme of cases.49 Such caution is appropriate because commercial absurdity tends to lie in the eye of the beholder, and the parties’ reasons for striking a particular bargain may not be easily understood by a court.50 As Lord Sumption has noted extra-judicially, the business common sense approach essentially leaves a judge to “reconstruct an ideal contract which the parties might have been wiser to make, but never actually did”.51
(e)Both pre-contractual negotiations and the parties’ post-contractual conduct may be admissible when interpreting a contract. The admissibility of such evidence is determined by the laws of evidence.52 Evidence of uncommunicated subjective intent is irrelevant to an objective, contextual interpretation of contracts.53 Equally, if evidence reveals what a party intended the words to mean, and that intention was communicated to and accepted by the counterparty, the evidence may demonstrate a common understanding of the meaning of the provision
48 At [89], citing Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28, [1998] 1 WLR 896 at 912 per Lord Hoffmann, and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14] per Lord Hoffmann. See also Antaios Compania Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 (HL) at 201, [1984] 3 WLR 592 at 598 per Lord Diplock, as quoted in Investors Compensation Scheme: “… 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”.
49 At [93].
50 At [90]–[91]; and SC judgment, above n 1, at [45] and [250].
51 Jonathan Sumption “A Question of Taste: the UK Supreme Court and the Interpretation of Contracts” (2016–2017) 8 The UK Supreme Court Yearbook 74 at 82–83. The author goes on to observe that judges’ notions of common sense tend to be moulded by their idea of fairness, even though commercial contracting parties act self-interestedly in entering contracts. Often the commercial common sense approach “becomes a means of saving one party from what has turned out to be a bad bargain”. In addition, the approach is difficult to reconcile with the high threshold that the law requires for the implication of terms into a contract and rectification (at 84–86).
52 SC judgment, above n 1, at [54].
53 At [48] and [68].
in issue.54 The evidence must be of a mutual subjective understanding to be relevant (have probative value).55
Whole contract approach and interpretation of related contractual instruments
[59] As I have noted, the real issue in this case concerns the relationship between a suite of related contracts. Those contracts gave effect to a single transaction but also created an ongoing commercial relationship which the parties expressly modified from time to time to reflect changing circumstances.
[60] A “whole contract” or holistic approach to interpretation proceeds on the basis that, as Lord Mustill said in Charter Reinsurance Co Ltd v Fagan, the words used by the parties in the contract in question “must be set in the landscape of the instrument as a whole”.56 As the authors of Burrows, Finn and Todd describe:57
[The “whole contract approach” to interpretation] involves reading a clause in the context of the whole document, or other documents that form part of the same contract. This may mean taking into account the overall scheme of the contractual terms and the apparent function of the different parts, or the apparent function of different clauses in one part of the agreement. Such an approach can assist in revealing how a particular provision should be understood to function. It can overlap with matters of background and business common sense, particularly where the contractual document contains information about the background or purpose of the agreement.
The internal contractual context will be of particular importance when another contractual term appears to overlap or conflict with the term that is the subject of interpretation. This may concern provisions in a single contractual document or in different documents recording the same transaction. When there is a conflict between two provisions in a contract, the court must read down the apparent scope or effect of one (or both) in order to resolve it. This may result in both provisions having effect within their respective spheres, or in one of the provisions being read so that is has no effect at all.
54 At [75]–[76].
55 Napier City Council v Local Government Mutual Funds, above n 43, at [49]. In that case, the Court of Appeal held that an insurer’s letter declining indemnity cover was a unilateral assertion of its position for the purposes of an existing claim, and the Council’s silence in response to it was “ambiguous” and therefore irrelevant and inadmissible (at [50]–[53]).
56 Charter Reinsurance Co Ltd v Fagan [1997] AC 313 (HL) 384.
57 Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (7th ed, LexisNexis, Wellington, 2022) at [6.3.4(b)] (footnotes omitted). See too Firm PI 1, above n 42, at [79], where the Supreme Court said that in interpreting commercial contracts the courts should have regard to the “structure of the parties’ bargain”.
[61] The authors give the example of Totara Investments Ltd v Crismac Ltd, where the Supreme Court was faced with competing clauses in related loan and mortgage documents.58 The mortgagee sought to exercise a power of attorney under mortgage documents to take further security while the mortgagor sought to rely on a provision in the loan agreement limiting liability to the value of the security provided. The Court held that the limited recourse clause in the loan document was expressed to be the paramount provision and therefore ought to be given full effect, even though that would leave the clause in the mortgage document with “little or no work to do”.59 It observed that drafters will often incorporate boilerplate provisions into commercial contracts that have limited or no use, either out of caution (the belt and braces approach) or without specific consideration of a specific function. While a court will strive to find a role for such provisions, their presence should not lead to the distortion of the parties’ objective intention as discerned from a reading of the whole contract.60
[62] To these important propositions may be added three further points. First, when a single transaction is carried into effect by several instruments, they are treated as one instrument, and must all be read together for the purpose of ascertaining the intention of the parties.61
[63] Second, when drafting contracts sometimes parties will deliberately leave wording that is ambiguous. This can be a normal aspect of the commercial process, made in the hope that things will go well, but that if they do not, and a dispute arises, a party can at least argue that their interpretation should be preferred. This approach to contractual drafting has been described as “studied ambiguity”. Lord Steyn observed in his 2003 article:62
58 Totara Investments Ltd v Crismac Ltd [2010] NZSC 36, [2010] 3 NZLR 285.
59 At [30].
60 At [31].
61 Halsbury’s Laws of England (online ed, 2019) Vol 32 Deeds and other instruments at [376]. For example, in Harman v Richards (1852) 10 Hare 81 (settlement of trust and separate property purchases held to be parts of the same transaction; had to be considered as a whole); and Plumrose Ltd v Real and Leasehold Estates Investment Society Ltd [1969] 3 All ER 1441, [1970] 1 WLR 52 (ostensible right of renewal in lease agreement had to be construed in light of previous lease agreement, in which a one-time right of renewal had been exercised).
62 Johan Steyn “The Intractable Problem of the Interpretation of Legal Texts” (2003) 25 Sydney L Rev 5 at 8. The New Zealand Court of Appeal recognised the concept of studied ambiguity (or “deliberate equivocation”) in GTV Holdings Ltd v Harris [2018] NZCA 95, [2019] NZCCLR 24 at [26]. See also Ward Equipment Ltd v Preston [2017] NZCA 444 at [85]; and Harris v GTV Holdings Ltd [2016] NZHC 3123 at [56].
Clarity is the aim in drafting commercial contracts but absolute clarity is unattainable. It is impossible for contracting parties to foresee all the vicissitudes of commercial fortune to which their contract will be exposed. Moreover, and quite understandably, business bargains have to be struck under great pressure of time and events. Often the phenomenon of studied ambiguity obtrudes: the parties cannot resolve a particular difference but leave it to the court to settle the issue. It is therefore tiresome for judges to expatiate on the quality of draftsmanship of commercial contracts. Judges must simply do the best they can with the raw materials produced in the real world.
[64] Similarly, Lord Sumption has suggested that the parties and drafters of a contract may not themselves have fully understood the objective effect of the words they have chosen:63
The construction of contracts can never be entirely free of artifice. One is, after all, concerned to discover an objective meaning which will not necessarily correspond with the assumptions or the hopes or fears of either party. Such is the nature of bargaining. The main artifice… is that the parties understood what they were signing up to as completely as a judge armed with a mass of objectively relevant and carefully analysed background information and the advantages of hindsight. One would think that the language that the parties have agreed provided the one sure foundation for a hypothetical reconstruction of their intentions.
[65] Third, there are at least three approaches to interpretation which might be taken in cases involving the effect of an amendment to one of a series of related contracts:64
(a)A “single contract” approach, whereby an amendment to one contractual document must be taken to alter any related contract to the extent required.
(b)A “contractual primacy” or hierarchy approach, where a change to a paramount document affects any subordinate agreements. In the present case, one might consider the Agreement to hold primacy over the subsequent agreements, which must be interpreted in light of any amendments to the primary contract.
63 Sumption, above n 51, at 74–75.
64 The first two approaches may often lead to the same result. The most appropriate approach to adopt is likely to depend on the terms of the agreements and the factual setting in which the issue arises.
(c)A third approach involves a narrow interpretation of the contractual amendment. Its meaning is taken at face value and effect is given to the particular words used. So where an amendment purports to vary a particular contract, a reading on this approach would be to interpret the variation as affecting only the particular document referenced.
[66] L&M essentially advances a narrow approach to interpretation. Bathurst, on the other hand, might be thought to advance one or both of the first two approaches.
Consideration
[67] At its essence, L&M’s claim under the Deed of Guarantee comes down to the following propositions:
(a)under cl 3.4(a) of the Agreement, Bathurst is obliged to make the first performance payment once 25,000 tonnes of coal has been shipped from the Permit Areas. The Supreme Court’s judgment has confirmed that liability has crystallised;
(b)the Deed of Guarantee secures the Guaranteed Money, which means “all amounts owing by Bathurst…in accordance with cl 3.4”;
(c)clause 3.10, introduced by the Amendment Deed, is limited in its effect to the Agreement. It does not affect Buller Coal’s liability under the guarantee; and
(d)accordingly, Buller Coal is liable under the Deed of Guarantee for the performance payment even though Bathurst is not.
[68] This reasoning of necessity creates an inconsistency between the provisions of the Agreement and the Deed of Guarantee. The question is whether that inconsistency would be ascribed to the relevant contracts by the reasonable person having all the relevant background knowledge. I do not consider that it would be.
[69] The Deed of Guarantee is not, as L&M’s approach might suggest, a free- standing contract that can be read in isolation. It is itself built upon the obligations in the Agreement, and expressly incorporates and responds to those obligations. The most important example in the present case is cl 3.4 of the Agreement, which is incorporated into the definition of Guaranteed Money. That definition makes it clear that the Guaranteed Money means sums owing by Bathurst under cl 3.4 of the Agreement. The guarantee does not give rise to a separate primary obligation on Buller Coal.
[70] L&M’s approach to interpretation is to restrict the operation of cl 3.10 to the Agreement, leaving cl 3.4 unaltered for the purposes of the Deed of Guarantee. However, cl 3.4 cannot be read without regard to cl 3.10. The former has a suspensory effect on the latter. That is so whether for the purpose of the Deed of Guarantee or the Agreement. It follows that reference to Guaranteed Money and Bathurst’s liability under cl 3.4 in the Deed of Guarantee is also subject to the suspension of the obligation in cl 3.10 of the Agreement. It simply defies common sense to interpret the two contracts as creating an inconsistency when the purpose of the parties, objectively ascertained, was to grant an indulgence in relation to the first performance payment, whether under the Agreement or otherwise.
[71] If as the Supreme Court found the suspensory effect of cl 3.10 is engaged, there is nothing currently “owing” by Bathurst under cl 3.4. Accordingly, the first performance payment is not Guaranteed Money for the purpose of the Deed of Guarantee. It follows that on the natural and ordinary meaning of the relevant provisions, there is no inconsistency. L&M’s argument requires the Court to ignore the effect of cl 3.10 on the operative provisions of the Deed of Guarantee. It also follows that it was unnecessary for the drafters of the Amendment Deed to expressly alter the terms of the guarantee. The guarantee continued to respond to the obligations in the Agreement as amended from time-to-time.
[72] I have arrived at an interpretation consistent with the outcome advanced by Bathurst and Buller Coal but for somewhat different reasons. However, out of deference to the careful arguments advanced by counsel I now turn to address them.
[73] It is true that the Agreement defines the “Agreement” as including “the background, the schedules and appendices”. Schedule 3 to the Agreement also sets out the “form” of the proposed guarantee and security deed, and it is clear that the guarantee eventually executed was in all material respects identical to that in the third schedule.
[74] However, while the architecture of the Agreement contemplated a suite of agreements collectively governing the sale and ongoing commercial relationship, at the time the Agreement was executed it was unknown whether a deed of guarantee would ever come into existence. That is because the Agreement itself was first conditional on Bathurst obtaining a suitable feasibility study and proceeding to settlement. It was only upon settlement that the Agreement required an executed deed of guarantee and security to be provided to L&M’s solicitors in “substantially the same” form. So while the Agreement was defined to include the schedules, it did not create the Deed of Guarantee. It merely provided machinery and the terms of a contract of guarantee should the Agreement become unconditional, and the sale of the shares proceed.
[75] I am therefore unable to accept from the inclusion of schedule 3 in the definition of “Agreement” that the Deed of Guarantee forms part of the Agreement. It seems more likely that the definition is expressed to include the background, schedules and appendices in order to avoid uncertainty about the status of non-operative provisions within the Agreement. Given the careful way in which the parties chose to structure their contractual relationships, including the creation of discrete contracts to govern particular aspects of their bargain, the indirect nature of Buller Coal’s interpretation tells against it.
[76] Buller Coal’s approach also does not engage with the express “no amendment” clause in the Deed of Guarantee. As noted, cl 16.8 provides that an amendment to the deed will only be effective if it is in writing and signed by all parties to the deed. However, Buller Coal was not a party to, and did not sign, the Amendment Deed (or the Agreement which it amended). If the parties had wanted to include the Deed of Guarantee in the Agreement, or ensure that any amendment to one contract expressly
amended the other, they would have used clear language to that effect. For instance, the “Agreement” could have been defined to include:
… the background, the schedules and the appendices, and any other agreement made as a consequence of this Agreement.
[77] The subsequent approach of the parties to amendments to the agreements is consistent with this conclusion. L&M and Bathurst were deliberate in determining the scope of agreements subject to each amendment deed, and careful to include only the parties to the contracts subject to change. That is unsurprising in a complex commercial transaction where another approach might give rise to unintended consequences. As O’Regan J noted in the Supreme Court:65
There was nothing in the Third Deed that created any change to the pre-existing relationship between L&M and Bathurst, aside from the flexibility given to Bathurst in regard to its performance payment obligations. Bathurst remained the effective owner and controller of the permit areas through Buller Coal and the maker of all decisions about the development and/or operation of mines in the permit areas, acting in its own interest. L&M remained a potential recipient of performance payments and royalties, but otherwise had no say over the development and/or operation of the mine. Clause 3.10 changed one aspect of the agreed arrangements: it allowed Bathurst to postpone the performance payments. …
[78] Overall, the language of cl 3.10, construed in the context of the contract as a whole, has an ordinary and natural meaning that is a powerful indicator of what the parties meant. I am unable to accept that the definition of “Agreement” in cl 1.1 is so expansive as to collapse the distinction between the various contracts, or the careful way in which amendments to them were subsequently undertaken.
[79] I therefore do not accept Buller Coal’s interpretive argument that the Deed of Guarantee formed part of the Agreement. But for the reasons I have outlined above, and for the reasons set out in relation to the second issue, that was not necessary to give coherent effect to the purpose of cl 3.10. That is because altering the scope of Bathurst’s primary obligations under the Agreement circumscribed Buller Coal’s secondary obligations under the Deed of Guarantee.
65 SC judgment, above n 1, at [244] (footnote omitted).
Is the first performance payment due under the Deed of Guarantee?
[80] The second issue is whether, as L&M submits, the first performance payment is due such that L&M is entitled to exercise its rights against Buller Coal under the Deed of Guarantee.
The parties’ arguments
L&M’s position
[81] L&M argued that the Supreme Court’s finding that the first performance payment is due under cl 3.4(a) means that the payment is now part of the Guaranteed Money under the Deed of Guarantee. Non-payment of that amount by Buller Coal on demand from L&M is an event of default crystallising L&M’s rights under the guarantee. The Supreme Court’s conclusions on the application of cl 3.10 of the Agreement were not intended to, and do not alter this outcome.
[82] Mr Smith submitted that the majority’s decision in the Supreme Court, distilled to its essence, is that the concession granted by L&M operated to suspend the obligation to pay the performance payment even though the debt had fallen due. Clause 3.10 is only capable of taking effect if a performance payment is already due, or, put another way, a due debt is a precondition of the clause. Clause 3.10 contains a concession from L&M to Bathurst that a failure by Bathurst to make a performance payment, when and as due, is not an actionable breach of the Agreement for so long as the relevant royalty payments are made. The concession does not remove the underlying obligation on Bathurst to make the first performance payment (which the Supreme Court held was triggered by 25,000 tonnes of coal being shipped). It is an agreement not to exercise enforcement rights under the Agreement while certain conditions subsist (that is, the relevant royalty payments continue to be made).
[83] In support of this interpretation of the decision in Bathurst, L&M pointed to statements in both the minority and majority judgments that confirm the first performance payment in cl 3.4(a) of the Agreement had become due. Winkelmann CJ
and Ellen France J considered that cl 3.10 had a “concessionary character” and, hence:66
… the clause addresses “a failure by [Bathurst] to make, when and as due, a Performance Payment”. It then provides for the situation in which L&M will, nonetheless, not exercise its rights.
(emphasis added)
[84]Equally, the majority described the effect of cl 3.10 as L&M “agreeing not to
enforce payment”,67 and considered that:
Under cl 3.10, L&M agreed that if Bathurst did not pay a performance payment when due, that would not be an actionable breach “for so long as the relevant royalty payments continue to be made under the Royalty Deed”.
(emphasis added)
[85] Mr Smith emphasised that all of the judges in the Supreme Court explicitly found that cl 3.10 of the Agreement amounted to a “concession”. A concession is not an amendment to or suspension of a contractual right but an indulgence or forbearance from exercising the right.68
[86] The Court’s conclusions reflect the language of cl 3.10, which L&M argued distinguishes between the payment being “due” and whether a failure to pay can be actioned. The clause only applies to performance payments which are “due”, but says a failure to pay “when and as due” is not an “actionable breach or default”.
[87] L&M also points to the anti-discharge clause in the Deed of Guarantee. Relying on the terms set out above at [43], it argues that the clause applies squarely on its terms and confirms that Buller Coal’s obligations under the guarantee are unaffected by the concession granted to Bathurst under cl 3.10. L&M says the anti-discharge clause
66 At [175]. See too [176], where the minority held that the concessionary character of the Amendment Deed is highlighted by the non-waiver provision which “makes it clear that L&M is not in this way waiving its rights under cl 9.7 of the Agreement for remedies on default”.
67 At [241]. Mr Smith relied generally on the majority’s reasons at [237]–[248].
68 L&M, in reply, also noted that in the previous proceedings Bathurst pleaded that this was the effect of cl 3.10. In particular, the second affirmative defence in its statement of defence pleaded that if the performance payment was “due and payable”, L&M “is not entitled to sue for [the] same”. In other words, L&M argued that Bathurst’s position in the previous litigation had been that cl 3.10 was an agreement not to sue for an existing obligation, rather than the effect of cl 3.10 was to remove the underlying obligation to pay.
“expressly anticipates” that Buller Coal can remain liable under the Deed of Guarantee in circumstances where L&M cannot, or has agreed not to, exercise rights against Bathurst under the Agreement. L&M also pointed to a range of authority, including the Court of Appeal’s decision in Cancian v Carters,69 to support the uncontroversial proposition that guarantees may remain enforceable even if the primary debt is unenforceable.
Buller Coal’s position
[88] For Buller Coal and Bathurst, Mr Hodder pointed to the nature of a guarantee. A guarantor undertakes a secondary liability which is co-extensive with the primary obligation of the debtor.
[89] While in a sense the first performance payment is “owing” by Bathurst, as the Supreme Court held that the 25,000 tonne threshold in cl 3.4(a) of the Agreement had been met, that does not take L&M very far because just as money borrowed from a bank by a homeowner on a 20-year fixed term mortgage is “owing” from the moment it is drawn down, the entire debt is not “due” to be repaid unless there has been a default (or a demand). Buller Coal says that the operative terms of the Deed of Guarantee put this conclusion beyond doubt. In particular, cls 2.1 and 2.2 mean that the Guaranteed Money has to be actually “due” by Bathurst, not just owing, before call can be made on Buller Coal as guarantor. This is reinforced by cl 9.1 which provides that an event of default includes a failure by Buller Coal to pay any of the Secured Money “on its due date”.
[90] Buller Coal submits that as the first performance payment is not due by Bathurst as the principal debtor, call cannot be made on it, as guarantor, to pay the same money. This is the consequence of the Supreme Court’s decision when applied to the terms of the Deed of Guarantee. And it is not possible for the High Court to now make the declaration that an event of default has occurred when the due date for payment of the Secured Money—that is, the date for making the performance payment—has not yet arrived.
69 Cancian v Carters [2021] NZCA 397, [2021] NZCCLR 13 at [22]–[26]; Richina Pacific Ltd v Samson Corporation Ltd [2018] NZCA 132, [2019] NZCCLR 19 at [41]; and the authorities referred to below at [95].
[91] Mr Hodder also took issue with L&M’s contention that the Supreme Court in Bathurst had concluded that the first performance payment was due. He drew attention to statements in the majority’s judgment which describe the effect of cl 3.10 as a mechanism which enabled Bathurst to “delay payment of the performance payment”,70 and entitled it “not to pay the performance payment that would be due but for the operation of cl 3.10”.71 These statements, he submitted, were inconsistent with L&M’s characterisation of the judgment.
[92] In terms of the anti-discharge clause, Buller Coal argued that the provision does not make it independently liable as a principal debtor. L&M’s reliance on it was misconceived because there is no suggestion that Buller Coal is seeking to be or has been discharged from its guarantee. Buller Coal remains a surety, but its liability as a surety remains necessarily bound by the liability owed by the principal debtor. So much is inherent in the nature of a contract of guarantee.
Consideration
[93]The answer to this question turns on three points:
(a)the law of guarantees and the secondary nature of the liability of a guarantor;
(b)the terms of the Deed of Guarantee and the Agreement; and
(c)the effect of the Supreme Court’s judgment and its application to the questions raised in this case.
The law of guarantees and the nature of liability of a guarantor
[94] A guarantee is a binding promise by one person to be answerable for a present or future debt or obligation of another if that other fails to pay.72 The essential
70 At [281].
71 At [273].
72 Wayne Courtney, John Phillips and James O’Donovan The Modern Contract of Guarantee (4th ed, Sweet & Maxwell, London, 2020) at [1-018]. See also Commissioner of Inland Revenue v Motorcorp Holdings Limited & Ors (7 March 2005) CA 17/04 at [60].
distinguishing feature of a contract of guarantee is that the liability of the guarantor is always ancillary, or secondary, to that of the principal, who remains primarily liable to the creditor. There is no liability on the guarantor unless and until the principal has failed to perform their obligations.73 This is known as the principle of co-extensiveness. It follows that to be enforceable against the guarantor, absent a provision to the contrary, there must first be a default in relation to a guaranteed obligation by the principal debtor.
[95] Nevertheless, as L&M argued at the hearing, guarantees may remain enforceable even if the primary debt is unenforceable. In illustration of that general proposition, it pointed to a number of well-known examples:
(a)statute barred debts remain due from the primary debtor and can be pursued against a guarantor;74
(b)guarantees also remain enforceable despite a debt becoming unenforceable against the primary debtor due to a contractual time bar;75
(c)debts can also remain enforceable against a guarantor after the primary debtor’s bankruptcy or liquidation;76 and
73 Geraldine Andrews and Richard Millett Law of Guarantees (7th ed, Sweet & Maxwell, London, 2015) at [1-005]. In contrast, a contract of indemnity imposes a primary liability upon the surety that liability is wholly independent of any liability which may arise as between the principal and the creditor (unless the indemnifier undertakes a joint liability with the principal) at [1-014].
74 David Marks and Gabriel Moss Rowlatt on Principal and Surety (6th ed, Sweet & Maxwell, London, 2011) at [8-28]; Phillips and O’Donovan Modern Contract of Guarantee (online ed, Thomson Reuters) at [5.1400]; Carter v White (1883) 25 Ch D 666 (CA) at 672 per Lindley LJ; Curwen v Milburn (1889) 42 Ch D 424 (CA) at 434–435; and Netglory Pty Ltd v Caratti [2013] WASC 364 at [297].
75 Healthscope (Tasmania) Pty Ltd v Australian Hospital Care Pty Ltd [2011] VSC 132 at [46]–[50].
76 Quainoo v NZ Breweries Ltd [1991] 1 NZLR 161 (CA) at 171–172; and Bank of New Zealand v Baker [1926] NZLR 462 (CA) at 490.
(d)a guarantor may remain liable where the creditor has agreed to release the primary debtor.77
[96] These illustrations were not, however, especially helpful because unlike the present case they generally involved principal debtors who had defaulted on their obligation to pay. Here, the principal obligation on Bathurst to make the performance payments remains enforceable, but the payment is not currently payable by Bathurst due to the suspensory effect of cl 3.10. In fact, Bathurst is not in default of the Agreement.
The terms of the Deed of Guarantee and the Agreement for Sale and Purchase
[97] The starting point is the obligation Buller Coal took on as guarantor. What did Buller promise to pay? The answer is in the operative provisions of the contract of guarantee at cls 2.1 and 2.2. They provide:
2GUARANTEE PROVISIONS
2.1Guarantee
The Guarantor [Buller] absolutely, unconditionally and irrevocably guarantees, to the Secured Creditor [L&M], the due and punctual payment by Bathurst of the Guaranteed Money.
2.2Guaranteed Money
The Guarantor undertakes that if Bathurst does not pay to the Secured Creditor any of the Guaranteed Money when due, the Guarantor will pay that Guaranteed Money to the Secured Creditor immediately on demand.
(emphasis added)
[98] Also relevant is cl 9.1 of the Deed of Guarantee, which defines an “Event of Default”. Such an event is a necessary precondition of L&M’s ability to enforce the
77 Cowper v Smith (1838) 4 M & W 519, 150 ER 1534; Union Bank of Manchester Ltd v Beech (1865) 3 H&C 672, 159 ER 695 (Exch) at 676 and 677; Perry v National Provincial Bank of England [1910] 1 Ch 464 (CA) at 471, 473, and 477–478; Bank of Adelaide v Lorden (1970) 127 CLR 185 at 191–193; Hancock v Williams (1942) 42 SR (NSW) 252 (NSWCA) at 256–257 per Jordan CJ; Pogoni v R & W H Symington & Co (NZ) Ltd [1991] 1 NZLR 82 (CA), cited with approval in Cancian v Carters, above n 69, at [22]; and Marks and Moss, above n 74, at [8-26].
guarantee against Buller Coal. Clause 9.1(a) provides that there will be an Event of Default where:
Non-payment: the Guarantor does not pay any of the Secured Money on its due date (unless the failure to pay is caused by administrative or technical error outside the Guarantor’s control and payment is made within two Business Days of its due date)
(emphasis added)
[99] The combined effect of these provisions is that the Guaranteed Money must be “due” by Bathurst in the sense that the time for payment has passed—and not merely “owing”—before a call can be made against Buller Coal’s guarantee. The operative provisions define Buller Coal’s obligation as a surety and confirm that its obligation is secondary to that of Bathurst’s liability under the Agreement. It is the Agreement that defines when the Guaranteed Money becomes due rather than the guarantee. Before an event of default can occur triggering enforcement rights under the guarantee there must first be a “default”. A default requires the failure of Buller Coal to pay any of the Secured Money on its due date. Failing to pay money that is not due is not an event of default. If the performance payment is not due from Bathurst because under cl 3.10 of the Agreement the necessary royalties have been paid to L&M, there can be no default by Buller Coal enforceable under the guarantee.78
[100] In my view, this is the inevitable effect of the Supreme Court’s finding that cl 3.10 provided Bathurst with the ability to defer the performance payments provided it continued to pay any applicable royalties. If, as the majority of the Supreme Court found, the contracts did not impose an obligation on Bathurst to keep mining coal at a specified level, it is neither here nor there that it has suspended mining operations for the time being. That is a corollary of the risk L&M took on when it entered into a long-term commercial venture where some of the consideration it might receive was contingent on Bathurst’s ongoing solvency and its broader commercial choices about the focus of its business.
78 This approach is consistent with the meaning attached to the expression in other cases: “A debt is “due” when it is payable”: Re European Life Assurance, L.R. 9 Eq. 122 per James VC, as cited in Greenberg (ed) Stroud’s Judicial Dictionary of Words and Phrases (10th ed, Westlaw, UK, 2021) at 785; “No doubt a debt can be said to be owing before it becomes due”: Quainoo v NZ Breweries Ltd, above n 76, at 171. The Shorter Oxford English Dictionary (6th ed, Oxford University Press, 2007) records that the expressions “fall due” or “become due” means to “become immediately payable”.
[101] L&M’s position is not improved by its reliance on the anti-discharge clause in the Deed of Guarantee. The clause is a common drafter’s technique to avoid the rule in Holme v Brunskill.79 At common law, any material variation of the terms of a guarantee as between a creditor and a principal debtor was effective to discharge the guarantor from their liability entirely.80 The rationale for the rule is that a guarantor should only be responsible for the obligation which he or she has guaranteed. If the creditor and the principal debtor agree to alter the nature of the obligation without the consent of the guarantor, the guarantor is fully discharged from any liability because the obligation is no longer that which they guaranteed. I agree with Mr Hodder that it is to the rule in Holme v Brunskill that the anti-discharge clause is directed.
[102] As the clause makes clear, alterations of Bathurst’s obligations under the Agreement will not alter or discharge Buller Coal’s obligations as guarantor under the Deed of Guarantee. But the effect of L&M’s argument is to read the anti-discharge provision, in conjunction with aspects of the Supreme Court’s judgment, so as to impose a primary obligation to make the performance payment when the principal obligor—Bathurst—has been relieved of that burden. Alternatively, its effect is to read cl 3.4(a) as imposing an obligation on Buller Coal without regard to cl 3.10. In my view neither contention is sustainable given the secondary nature of Buller Coal’s liability as guarantor.
[103] As Bathurst submits, it is to the principal obligation of the debtor that the guarantee reacts. If the nature of the principal obligation is altered, it is to the altered obligation that the guarantee responds. As the authors of The Modern Contract of Guarantee put it:81
A guarantor’s liability parallels and depends directly upon the principal debtor’s. The principle of co-extensiveness generally applies, so that a change in the debtor’s obligation will, subject to certain protective principles, produce a corresponding change in the guarantor’s.
[104] However, the effect of L&M’s argument is to turn on its head, or at least render pointless, the concession it acknowledges it granted to Bathurst. And while it was a
79 Holme v Brunskill (1878) LR 3 QBD 495.
80 Cancian v Carters, above n 69, at [16].
81 Courtney, Phillips and O’Donovan, above n 72, at [1-092].
concession, as the Supreme Court observed, there was a self-serving reason for making it. L&M appreciated that without the concession Bathurst’s capital raising efforts would be scuppered, together with L&M’s hopes of the successful development of the mining operation and, ultimately, receipt of the performance payments.
[105] In the context of the overall bargain the parties struck, either a concession was granted or it was not. L&M’s argument in my view leads to the unlikely result that having granted Bathurst the ability to defer the due date for payment of a debt, Buller Coal’s liability as guarantor has become the primary obligation without any amendment to the Deed of Guarantee to support such a radical change in its legal obligation. In this respect, the guarantee does not contain a “principal debtor” clause. As Bathurst argues, it seems clear that no one involved in drafting the contracts overlooked the importance of such clauses in 2010. Under the terms of the contemporaneous Royalty Deed, Bathurst’s guarantee of Buller Coal’s obligation to make the royalty payments does contain a principal debtor clause:
12.2 The guarantee contained in clause 12.1 shall operate as a principal obligation such that the Guarantor [Bathurst] is a primary obligor and not a surety only, and shall not be affected by any waiver, granting of time or other indulgence given by the Grantor [L&M] nor by any act or omission of the Grantor.
[106] Overall, I consider it was no accident the parties did not amend the terms of the Deed of Guarantee as part of the changes brought about by the Amendment Deed. Given the secondary nature of Buller Coal’s obligation as guarantor, there was no need to do so. Once Bathurst’s obligation to make payment of the first performance payment is deferred, there can be no default to which Buller Coal’s guarantee responds.
[107] Finally, it is notable that L&M did not argue, in reliance on cl 2.3 of the Deed of Guarantee, that Buller Coal’s obligation arises from a contract of indemnity. Unlike a contract of guarantee, in a contract of indemnity a primary liability falls on the surety, and that liability is wholly independent of any liability which may arise as between the principal and the creditor.82 However, while cl 2.3 is entitled “indemnity”, and uses
82 Andrews and Millett, above n 73, at [1-014].
the expression “indemnify”, its terms make it clear that Buller Coal’s liability is once again secondary:
[Buller Coal] undertakes to indemnify and hold harmless [L&M] for and against all losses, costs, expenses and liability [L&M] may suffer or incur as a result of any of the Guaranteed Money not being paid for any reason, and undertakes to pay to [L&M] the amount certified by [L&M] as being required to so indemnify it immediately on demand.”
[108] As Guaranteed Money means “all amounts owing by Bathurst to [L&M]” under cl 3.4 of the Agreement, the “indemnity” is simply an obligation to pay that which Bathurst has failed to. This conclusion is also consistent with the presence of the anti-discharge clause, which would otherwise be an unnecessary redundancy.
The effect of the Supreme Court’s judgment in the context of this case
[109] L&M’s argument on the effect of the Deed of Guarantee turns on a particular interpretation of the Supreme Court’s judgment. L&M submits that all of the judges in the Supreme Court were agreed that the contractual threshold in cl 3.4(a) of the Agreement (governing liability for the first performance payment) was triggered and, therefore, the effect of the judgment is that the debt is now due. Clause 3.10 merely suspends the enforcement of the debt by Bathurst. But as the liability has crystallised, Buller Coal remains liable for the performance payment separately under the Deed of Guarantee.
[110] With respect to the careful argument counsel made, I do not think this entirely reflects the Supreme Court’s decision. It is of course true that the Court was unanimous in finding that requisite volume of coal had been “shipped” in order to trigger liability under cl 3.4(a) for the first performance payment. However L&M’s interpretation of the judgment overlooks the majority’s conclusion on the effect of cl 3.10 on that putative liability. What the Court determined is that so long as the appropriate royalties are paid (if any), the performance payment is deferred. Or, as the majority put it, “Bathurst was entitled under cl 3.10 to delay payment of the performance payment”.83 A payment that has been deferred is not one that is due and presently payable. So while
83 At [281]. The same point was made at [244]: “Clause 3.10 changed one aspect of the agreements: it allowed Bathurst to postpone the performance payments”. Winkelmann CJ and Ellen France J described Bathurst’s interpretation of the clause as “unlikely, because it involves L&M giving away a right to USD 40 million in return for a unilateral option to pay” (at [193]).
it might be fair to say the effect of the Supreme Court’s decision is that the contractual threshold in cl 3.4(a) has been met and the first performance payment would be due, that is only if Bathurst fails to pay the appropriate royalties. There is no suggestion that it has.
Do the Contract and Commercial Law Act or an implied term permit Buller Coal to rely on cl 3.10?
[111] In the alternative, Buller Coal argued that it was entitled to enforce the benefit of cl 3.10 under s 12 of the Contract and Commercial Law Act, and that the Court should find an implied term in the Amendment Deed. Given my findings on the first two issues I can state my reasons in relation to these issues briefly.
Is L&M’s promise in cl 3.10 enforceable by Buller Coal under s 12?
[112]Section 12 of the Contract and Commercial Law Act 2017 provides:
12 Deed or contract for benefit of person who is not party to deed or contract
(1)This section applies to a promise contained in a deed or contract that confers, or purports to confer, a benefit on a person, designated by name, description, or reference to a class, who is not a party to the deed or contract.
(2)The promisor is under an obligation, enforceable by the beneficiary, to perform the promise.
(3)This section applies whether or not the person referred to in subsection (1) is in existence when the deed or contract is made.
[113]Mr Hodder submitted that the two necessary elements under s 12 are met:
(a)First, L&M by the Amendment Deed clearly conferred, or purported to confer, a positive benefit, permitting the recipients of its promise to postpone their liability to make a performance payment that otherwise would have fallen due. A benefit is defined in the Act to include “any advantage”.84
84 Contract and Commercial Law Act 2017, s 11.
(b)Second, the person receiving the benefit—in this case Buller Coal—is not a party to the Amendment Deed but is sufficiently described or referenced by class given that the Deed expressly refers to the Agreement (which Buller Coal says it is a party to as a matter of interpretation)85 and the Royalty Deed (under which Buller Coal is the party liable to make the relevant royalty payments).
[114] I am unable to conclude that the second requirement is met. While cl 3.10 clearly confers or purports to confer a benefit, s 12 does not attach to free-standing benefits. It applies only to those conferred “on a person designated by name, description or reference to a class, who is not a party to the deed or contract”. The Amendment Deed does not confer or purport to confer any benefit on a party beyond those named in the Deed (namely, Bathurst and L&M).86 It does not need to given my conclusion that the effect of cl 3.10 is to defer liability not only for Bathurst under the Agreement but also for Buller Coal under its guarantee.
[115] Nor is there anything in the Amendment Deed that can be said to designate Buller Coal as the beneficiary of a promise. The parties were careful throughout their preparation of seven deeds to include, or exclude, the appropriate entities for each agreement. The way they did so reflects a self-conscious approach to the overall structure of the transaction and the relationship of Buller Coal to its parent company, the assets and the mining operation. It would in my view be disruptive of the framework created by the contracts to hold that Buller Coal, which derives an indirect benefit from cl 3.10, is entitled to enforce the provision directly under s 12.
[116]I therefore dismiss this ground of defence.
An implied term?
[117] Buller Coal also advanced a positive defence asserting a term should be implied into the Amendment Deed in terms that would have the same effect as its
85 I did not accept this argument: see above at [53]–[54] and [73]–[78].
86 While there may be an indirect benefit for Buller Coal from cl 3.10 because of the secondary nature of its liability under the guarantee, that benefit arises by operation of the terms of the related contracts and the law of guarantees. It is not a benefit of a kind enforceable by Buller Coal through s 12.
argument under s 12 (namely, that cl 3.10 would also apply for its benefit). The defendants submitted that this is a classic “so obvious it goes without saying” implied term.
[118] The leading case in the implication of terms into an agreement is of course the Supreme Court’s judgment in Bathurst. The Court identified six points governing the implication of terms, of which the following are relevant:87
(a)The legal test for the implication of a term is a standard of strict necessity, a high hurdle to overcome.
(b)The starting point is the words of the contract. If a contract does not provide for an eventuality, the usual inference is that no contractual provision was made for it.
(c)An unexpressed term can only be implied if the court finds that the term would spell out what the contract, read against the relevant background, must be understood to mean.
(d)The inquiry for the court when considering the implication of a term is an objective one—it is the understanding of the notional reasonable person with all of the background knowledge reasonably available to the parties at the time of contract that is the focus of this assessment. The court is tasked with the role of constructing the understanding of that reasonable person.
[119] If I am wrong in my conclusion in relation to the second issue—that the alteration of Bathurst’s liability by cl 3.10 must in turn inform L&M’s rights against Buller Coal under the guarantee—I would have found that a term of the nature Buller Coal contends for would be considered by a reasonable person to “go without saying”.88
87 SC judgment, above n 1, at [116(a)–(f)].
88 SC judgment, above n 1, at [116(f)], citing Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988 at [21]; and Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742 at [21].
[120] As I have said, L&M either granted a concession or it did not. It is commercially absurd in my view to regard it as having provided Bathurst with the ability to defer the performance payment while retaining a right under the guarantee to require the performance payment from Buller Coal. Such an outcome is at odds with L&M’s commercial interests at the time cl 3.10 was promulgated. L&M had an interest in supporting Bathurst’s capital raising efforts in order to receive the first performance payment. If Buller Coal was still liable to make the payment despite the concession granted to Bathurst, given market disclosure requirements it would seem L&M’s interpretation of its rights under the Deed of Guarantee would have frustrated the very outcome it supported. In my view, a reasonable person armed with the relevant background would consider an implied term would be strictly necessary to give effect to the changed position under the contracts.
Does a Henderson v Henderson abuse arise?
[121] Buller Coal raises a further affirmative defence. It argues that L&M should have brought its claim under the Deed of Guarantee at the same time as it sought performance of the Agreement, as both claims form part of the same subject matter. Raising the new claim under the guarantee in this second proceeding infringes the rule in Henderson v Henderson, particularly given L&M has reversed its position from the prior litigation in relation to the status of the guarantee in order to bring this claim.
[122] L&M says there is no abuse of process. It was entitled to pursue the debtor of its choosing in the first proceeding, and that its decision to seek to enforce only the Agreement was reasonable.
Legal principles
[123] Litigation should not be undertaken by instalment. 89 It is therefore generally incumbent on a party to litigation to raise every point that is relevant to the issues before the court in that litigation.90 Except in special circumstances, the courts will not
89 Faloon v Planning Tribunal [2020] NZCA 170 at [2].
90 Broadspectrum (New Zealand) Ltd v Nathan [2017] NZCA 434, (2017) 15 NZELR 398 at [49] citing Sir James Wigram VC’s famous dictum in Henderson v Henderson (1843) 3 Hare 100 at 114, (1843) 67 ER 313 at 319 (Ch).
permit litigants to later re-open the same subject on a different basis.91 The rule promotes finality and alleviates the burden on defendants who might otherwise face successive waves of litigation concerning the same subject matter.92 It also promotes public confidence in the administration of justice by ensuring economy in the allocation of public resources to the question between the parties.93
[124] Lord Bingham of Cornhill succinctly stated both the principle and the approach to be taken by the court in these terms:94
… Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party.
(emphasis added)
[125] A Henderson abuse of process is different from, although closely related to, issue estoppel or res judicata.95 The latter applies where an issue has already been finally determined in a previous proceeding, the former when an issue was not raised but ought to have been. However, as Mr Martin Smith for L&M points out, it does not
91 Henderson v Henderson, above n 90, at 114–115; and Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1 (HL).
92 See for example Barrow v Bankside Agency Ltd [1996] 1 WLR 257 (CA) at 260, cited in Dunstan v Auckland High Court [2022] NZCA 478 at [14]; Bhanabhai v Commissioner of Inland Revenue [2007] 2 NZLR 478 (CA) at [58]–[62]; and Beattie v Premier Events Group Ltd [2014] NZCA 184, [2015] NZAR 1413 at [43]–[46].
93 Johnson v Gore Wood & Co, above n 91, at 31.
94 At 31.
95 Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] UKSC 46, [2014] AC 160 at [17]–[26] per Lord Sumption, cited in Craig v Stringer [2020] NZCA 260, (2020) 25 PRNZ 367 at [19]– [20]. His Lordship described res judicata as a rule of substantive law, while abuse of process as a concept which informs the exercise of the court’s procedural powers: “In my view, they are distinct although overlapping legal principles with the common underlying purpose of limiting abusive and duplicative litigation. That purpose makes it necessary to qualify the absolute character of both cause of action estoppel and issue estoppel where the conduct is not abusive.”
necessarily follow that because a party could have raised a matter in an earlier proceeding that it should have. Such an approach was considered too inflexible or “dogmatic” in Johnson v Gore Wood & Co. Instead, a “broad, merits based judgment” is required which takes into account:96
… the public and private interests involved and … all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before.
[126] There is no question that L&M could have sought to enforce the guarantee made by Buller Coal at the same time it brought proceedings against Bathurst under the Agreement. Indeed, L&M’s position is effectively that it considered that course of action but decided against it. The main issue therefore is whether L&M should have advanced its claim under the guarantee in the previous litigation such that its attempt to do so now amounts to an abuse of process. The defendants as the parties alleging the abuse bear the onus of proof.
The parties’ arguments
[127] Mr Hodder submits that L&M was required to bring forward its whole case when it first sued Bathurst and Buller Coal in December 2016, including its claim against Buller Coal under the guarantee. He highlights the almost identical nature of the two proceedings: both involve the same two defendants, the same performance payment, the same suite of interconnected contractual documents, and are predicated on the same root basis of liability (that it was Buller Coal’s cessation of mining activity in May 2016 that caused the suspensory effect of cl 3.10 to come to an end). Not only does this very similar proceeding create obvious inefficiency, it places a heavy burden on the defendants who have to respond to yet more litigation having understood that the judgment of the Supreme Court had finally resolved their uncertainty. The policy interests underpinning the rule in Henderson are therefore squarely engaged. Further, L&M has not provided any good reason for failing to also seek relief under the guarantee, which would have been a simple matter given it was suing Buller Coal anyway and had explicitly referred to the Deed of Guarantee in its statement of claim
96 Johnson v Gore Wood & Co, above n 91, at 31, cited in White v Attorney-General [2021] NZCA 479 at [31]–[32].
in the first proceeding.97 Nor is there any special circumstances or new evidence (save for the Supreme Court’s judgment declining L&M relief) to justify the new proceedings.
[128] Mr Hodder also argues that L&M has fundamentally changed its position from the prior litigation in order to run this new proceeding, and that this supports a finding of abuse. He says that throughout five years of litigation culminating in the Supreme Court, L&M accepted that Buller Coal’s liability under the guarantee was secondary to Bathurst’s liability as principal debtor. He says this is illustrated by the fact that L&M did not pursue Buller Coal for the performance payment when the 25,000 tonne threshold was reached in 2015, and concessions made by L&M’s counsel before the courts. In particular, he points to the following exchange in the Supreme Court following a question from the bench seeking clarification as to the relevance of the Deed of Guarantee:
COUNSEL FOR L&M:
Yes. The point is that not only do clauses within the ASP, 9.7 and 9.3, plainly say that the money has to be paid and LMCH can take steps to make sure it’s paid once the performance payment is triggered, and not only does the royalty deed in clause 4.1 not say anything contrary to that, but there’s also a security and guarantee deed that gives LMCH secondary security rights against the assets of Buller Coal in the event that the performance payments specifically aren’t paid when due.
O’REGAN J:
This doesn’t really take us anywhere, does it, because the guarantee would only be triggered if in fact clause 3.10 doesn’t apply and they do in fact have to pay?
COUNSEL FOR L&M:
Oh, certainly …
(emphasis added)
[129] The clear inference to be drawn from all of this, it is said, is that L&M, unable to accept the loss in the Supreme Court, is now straining for a new argument to circumvent the Court’s decision.
97 This could have been done by adding to the prayer for relief words to the effect of “… and even if not due and owing by Bathurst, it is still due and owing by Buller as guarantor”.
[130] L&M’s argument in response is simple. It had enforcement rights under two separate contracts—against Bathurst under the Agreement, and Buller Coal under the Deed of Guarantee—and it was entitled to pursue either at its discretion. It chose to first pursue solely the primary debtor, Bathurst, and is now entitled to call on the guarantor, Buller Coal. The fact that the two proceedings arise from the same suite of contracts does not mean that the second proceeding is an abuse.98 A claimant, it is said, is not required to pursue all claims or all defendants in the same proceeding. The obligation is instead to act reasonably,99 and it has done so by preferring to pursue Bathurst as the principal debtor in its first proceeding.
[131] Mr Martin Smith, who carried the argument on this issue, pointed to case law confirming that lenders commonly proceed separately against principal debtors and guarantors.100 Mr Brogan, L&M’s director, and Mr Kettle, a commercial barrister, gave evidence that it is common for a financier to proceed solely against the principal debtor and, if that does not result in payment, only then pursue a guarantor.
[132] L&M also relies on the decision of the English Court of Appeal in Securum Finance Ltd v Ashton. There the Ashtons guaranteed the liabilities of a company to a bank by executing a personal guarantee supported by a mortgage over their home. The bank initially sued under the guarantee but that proceeding was dismissed for want of prosecution, and it then brought a claim under the mortgage for sums due under the guarantee. Chadwick LJ, writing for the Court, expressed doubt as to whether the principle in Henderson v Henderson applies to issues arising from a claim on a covenant for repayment:101
… it is, to my mind, bizarre to suggest that, in the earlier proceedings, it would have been appropriate to rely both on the cause of action founded on the guarantee alone and on a cause of action (theoretically distinct, but in the circumstances as they then were indistinguishable from) founded on the covenant in the legal charge. For the reasons explained by Lord Justice Schiemann in National Westminster Bank Plc v Kitch [1996] 1 WLR 1316 there are good reasons for choosing not to sue on the covenant in a mortgage when it is unnecessary to do so. …
98 Citing Contact Energy Ltd v Attorney-General [2009] NZCA 351.
99 K R Handley Spencer Bower and Handley: Res Judicata (5th ed, LexisNexis, 2019) at [26.19]– [26.21].
100 See the authorities referred to above at [95](d).
101 Securum Finance Ltd v Ashton [2000] EWCA Civ 197, [2001] Ch 291 at [16]–[17].
Nor, as it seems to me, can it be argued that a secured creditor who chooses, in the first place, to sue for payment alone, is thereafter precluded from seeking to enforce his security in a separate action on the grounds that that was a claim that could have been advanced in the first action.
[133] Accordingly, L&M submits that it was within its rights to pursue only Bathurst in the first proceeding, and to pursue Buller Coal in this action under the guarantee. Suing under the Deed of Guarantee in the first proceeding would have added cost and complication to the original proceedings. L&M denies that it has changed its position, arguing that no weight can be placed on passing oral exchanges between counsel and the bench in the crossfire of a hearing.
[134] Finally, Mr Smith also submitted that the Henderson rule is not engaged where declaratory relief is responsibly sought by L&M about its ability to exercise “self-help” remedies under the guarantee and related security. A stay in the present case (the remedy for a Henderson abuse) would still not prevent L&M appointing receivers to Buller Coal under the Deed of Guarantee or avoid the need for the central question in issue in this case to be determined by another court on another day, given Bathurst would challenge any direct pursuit of security rights by L&M.
Consideration
[135] I consider L&M should have brought the current claim in its earlier proceeding and that doing so now is an abuse of procedure. There are three reasons for my view.
[136] First, in contrast to the plaintiff in Securum v Ashton, L&M is not an institutional lender and policy concerns like finality have greater significance in the present case.
[137] Securum concerned a loan from a bank to a company which was secured by a guarantee and then a mortgage provided by Mr and Mrs Ashton. The Court of Appeal of England and Wales considered that although the bank’s first proceeding to recover the debt under the guarantee had been struck out for want of prosecution, the Henderson v Henderson rule did not prevent the bank pursuing the same debt in subsequent proceedings under the mortgage. The Judge in the High Court, with whom
the Court of Appeal agreed, observed that a bank was not required “to fire its heaviest guns during the opening rounds of the conflict”.102
[138] It is well established as a general principle that a creditor is entitled to pursue the debtor of its choice and may do so in sequential proceedings.103 The evidence of Mr Brogan for L&M was that “financiers” (in other words, institutional lenders) commonly proceed first against a primary debtor and then, only if recovery fails, the guarantor. An obvious reason for this approach is cost and efficiency of recovery, as well as accepted commercial norms within the finance market. However, L&M cannot call itself an institutional lender and the applicable commercial norms are not the same. Here, there is a greater private and public interest in avoiding duplication of recovery proceedings.104
[139] Second, the broad merits based assessment contemplated by the House of Lords in Johnson v Gore Wood & Co105 tells against L&M’s ability to bring a second instalment of litigation. In particular, L&M has not provided a satisfactory explanation for its failure to bring the present claim as part of its earlier proceeding.
[140] The previous proceedings involved all the same parties. It involved the same primary obligation—the first performance payment. And it is clear that the Deed of Guarantee was in evidence, so it can hardly be said that L&M was unaware of its ability to pursue its position under the guarantee at the time it brought the first proceeding. The principal evidence in the present case was essentially the same (being the various contracts). There is no suggestion L&M lacked the funds or the ability to pursue the present claim previously, or that new evidence has come to light which might suggest the decision to defer the claim was reasonable.
[141] Given all of this, can it be said that L&M acted reasonably when it chose not to pursue the present claim in the previous litigation? The reason Buller Coal was
102 Securum Finance Ltd v Ashton [1999] 2 All ER (Comm) 331 (HC) at 347.
103 Andrews and Millet, above n 73, at [7-009]: “In general terms the creditor has a completely unfettered choice as to how, and against whom, he should proceed to recover the debt or damages to which he is entitled.”
104 In Arbuthnot Latham Bank Ltd v Trafalgar Holdings Ltd [1998] 1 WLR 1426 (CA), the prelude decision to Securum, Lord Woolf MR warned banks that “warehousing” proceedings against debtors until it was convenient to pursue them was likely to amount to an abuse of process.
105 Set out above at [125].
joined to the first proceeding is recorded economically in Mr Brogan’s affidavit of 29 March 2022:
The reason why Buller Coal was included as second defendant was that Buller Coal is party to the Deed of Royalty, and, under that deed, is the party responsible for making the relevant royalty payments (see, in particular, cls 3 and 4 of the Deed of Royalty). The claim made factual allegations about Buller Coal’s conduct of mining activity and whether the relevant royalty payments continued to be made under the Royalty Deed.
[142] As Mr Hodder points out, however, that is not the whole story. There was no dispute that Buller Coal had continued to pay royalties on all coal sales in accordance with the Royalty Deed. L&M’s case was that the level of royalty payments were no longer high enough and therefore brought to an end the effect of cl 3.10 of the Agreement. That was fundamentally a legal question. There was no need to determine any factual questions around Buller Coal’s mining activity—it was common ground that mining had halted in May 2016.
[143] More fundamentally, the Deed of Guarantee was expressly pleaded by L&M in the previous proceedings, including that “Buller guaranteed, in favour of [L&M] the payment of the Performance Payments…”. L&M went on in its prayer for relief to seek “A declaration that the First Performance Payment has become due and owing by Bathurst … to [L&M]”. It was therefore at least implicit in its previous claim that had L&M obtained the declaration it sought that Buller Coal would also be liable under the Deed of Guarantee.
[144] Turning to the reasons for L&M’s decision to pursue sequential claims against the same parties for the same sum of money, the evidence provided is, with respect, slim. In his first affidavit Mr Brogan deposed:
[L&M] understands that one of the arguments taken by Buller Coal is that [L&M’s] claims under the [Deed of Guarantee] in this proceeding should have been brought as part of the prior litigation. In my experience – including my experience as a senior executive for various banking groups as described above – it is common for a financier to deal with the principal debtor and any guarantor separately, normally by proceeding against the debtor first and then only later considering whether to enforce against the guarantor if steps against the debtor do not result in payment. That is what [L&M] is doing in this case.
[145]Then in his affidavit in reply dated 12 May 2022, Mr Brogan said:
I agree with Mr Kettle that it is common for creditors to pursue a principal debtor and guarantor separately and that ultimately what is done is a fact specific judgement. However, I disagree with his evidence … that it is “equally common” to enforce against the guarantor first as against the principal debtor first and that it is “more usual” in the context of a holding company and wholly-owned subsidiary to pursue both the principal and guarantor at the same time.
In my experience as a financier in the resources sector, it is normal to pursue the debtor first and the guarantor separately subsequently, if required. Where the debtor and guarantor are related this is a relevant consideration for the creditor in deciding how to proceed. However, it is still not by any means unusual for the creditor to pursue a related creditor and guarantor separately. In the end as Mr Kettle has said, it is a fact specific judgement.
[146] This evidence sheds no real light on why L&M chose not bring its claim previously, or why that course of conduct was reasonable given the significant duplication of resources (with all that entails for the court and the defendants) that would otherwise have been avoided.
[147] In the absence of an adequate explanation for its chosen course, I consider L&M should have brought this claim when it first sued Bathurst and Buller Coal. Given it had already resolved to sue both parties, there were clear benefits to be gained from doing so. That is especially so given the close relationship between the defendants.106 The litigation was always going to be hard fought given the significant sum in issue, and for the same reason there was also every prospect of an appeal no matter who won. In those circumstances, the proposition that L&M was entitled to sit on its claim under the Deed of Guarantee is untenable, given the broader private and public interests engaged. Nor are there special circumstances that would otherwise support a second proceeding involving the same subject matter. In my view, the core policy reasons underlying the rule in Henderson are in issue: there should be finality in litigation and a party should not be twice vexed in the same matter.107
[148] Third, I am also left with the distinct impression that at the time it initiated its first proceeding, L&M considered Buller Coal’s liability under the Deed of Guarantee
106 It appears the parties in the first proceeding (and certainly the Supreme Court) more or less treated the two entities as effectively the same: SC judgment, above n 1, at fn 16.
107 Johnson v Gore Wood & Co, above n 91, at 32.
was secondary to and dependent on Bathurst’s liability under the Agreement. This would explain why L&M did not bring the present claim in its previous proceeding.
[149] It would seem likely that L&M has changed its position on the nature of Buller Coal’s liability in order to bring this claim. L&M is effectively trying to undermine the outcome of the Supreme Court’s judgment by running an argument that it chose not to run in the first instance.
[150] For these reasons, I consider that L&M should have sought relief under the Deed of Guarantee when it first commenced proceedings against Bathurst and Buller Coal, and that its attempt to do so now is an abuse of process. Had I not found in favour of the Bathurst interests in relation to the first and second issue, I would have stayed the proceeding.
Remaining procedural issues
[151] In addition to the Henderson estoppel point, there are two procedural aspects of the claim and defence which need only be touched on briefly.
L&M’s challenges to the admissibility of evidence
[152] L&M identifies significant portions of the briefs of evidence of two witnesses for Buller Coal, Mr Tacon and Mr Kettle, which it says are inadmissible.108 The relevant parts of the briefs are said to amount to:
(a)evidence of subjective opinion or intention about the meaning and purpose of the contracts in issue;
(b)legal submission about the interpretation of the contracts in issue, or submission about the evidence given in the prior litigation;
(c)hearsay evidence, or personal summaries of evidence given in the prior litigation; and
108 In a letter of 11 May 2022, L&M’s solicitors notified the defendants of the intended challenge in accordance with r 9.11 of the High Court Rules 2016. Buller Coal’s solicitors, in a letter of 26 May 2022, denied that the challenged evidence was inadmissible.
(d)material that is otherwise irrelevant to determining the issues in question.
[153] Ultimately, it has been unnecessary for me to determine the admissibility of the impugned evidence because in reaching my conclusions on the substantive issues I have not found it necessary to have regard to it. The extent of the objections, however, raises a question about the suitability of the declaratory judgments procedure for determining questions of contract interpretation where background and context are in dispute.
The use of the declaratory judgments procedure
[154] The second procedural issue is raised by Buller Coal. Mr Hodder questioned the appropriateness of the Declaratory Judgments Act procedure here, suggesting that its use could in itself be an abuse of process. He submits that the declaratory judgments procedure is inappropriate where there are disputed facts or issues of mixed fact and law. That is especially so given L&M’s objection to the evidence for Buller Coal.
[155] Bathurst did not seek an order striking out or staying the proceeding on this ground, but rather raised the issue as a protest in response to L&M’s extensive objections to its evidence. Again, given the conclusions I have reached on the substantive issues it is unnecessary to say more, other than that in cases of interpretation of a contract involving contested evidence of background and context it may be that declaratory proceedings are not the most appropriate vehicle by which to bring the evidence before the Court.
Conclusion and result
[156]In conclusion, I have found that:
(a)Clause 3.10 in the Amendment Deed did not amend the Deed of Guarantee. It did not need to in order to achieve a coherent effect in relation to the rights and obligations of the parties. As the first performance payment is not owing from Bathurst as a result of cl 3.10, the payment is not Guaranteed Money for the purpose of the guarantee.
(b)The first performance payment is not currently due under the Agreement by Bathurst. As Buller Coal’s liability under the guarantee is secondary, there has been no Event of Default and L&M is not entitled to enforce its security rights.
(c)L&M’s decision not to bring the current claim as part of its original proceedings is not adequately explained or reasonable in the circumstances. Had I not found against L&M in relation to the second issue I would have stayed the proceeding on the basis of the rule in Henderson v Henderson.
[157]Accordingly, L&M’s application for a declaration is dismissed.
Costs
[158] Costs should follow the event. My current inclination would be to award Bathurst costs on a 2B basis and to certify for second counsel. If the parties are unable to resolve the issue amongst themselves they may file memoranda of no more than 10 pages. I will then determine costs on the papers.
Post-script
[159] Finally, I thank the parties and counsel for their patience in relation to delivery of this judgment. I very much regret the delay.
Isac J
Solicitors:
Gilbert Walker, Auckland for Plaintiff
MinterEllisonRuddWatts, Wellington for Defendants
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