CONSTRUCTION OF CONTRACTS: THE AMBIGUITY GATEWAY AND THE CURRENT STATE OF THE LAW, PART 6

MAHA CHAAR

B NSW Court of Appeal Reacts

Not surprisingly, the New South Wales Court of Appeal in Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113 at [71], expressed the view that paragraph 35 of Woodside was inconsistent with Jireh. The Court in Mainteck said that the High Court in Woodside:

confirms that not only will the language used “require consideration” but so too will the surrounding circumstances and the commercial purpose or objects. … It cannot be that the mandatory words “will require consideration” used by four Justices of the High Court were chosen lightly, or should be “understood as being some incautious or inaccurate use of language.

In other words, the Court formed the view that Woodside had revised the true rule set down in Codelfa.

The controversy over the fate of the ‘true rule’ intensified dramatically from that date.[1]

C WA Court of Appeal Remains Steadfast

The WA Court of Appeal, in the same year, namely 2014, formed a different view to NSW in its decision in Technomin Australia Pty Ltd v Xstrata Nickel Australia Operations & Anor [2014] WASCA 164.

The appellant, Technomin, brought an action to establish its entitlement to payment of mining royalties by Xstrata under a deed made in 1994. Technomin claimed to be entitled to a gross production royalty in the vicinity of $100 million under the terms of a ‘GPR Deed’ upon minerals mined at the Cosmos Nickel Mine operated by Xstrata.

By the GPR Deed, Xstrata agreed to pay to Technomin a royalty equal to 2% of gross proceeds of saleable product derived from any “Tenement” covered by the Deed.

Xstrata subsequently amalgamated the tenements covered by the GPR Deed into one tenement. The contentious issue became whether the royalty payable under the Deed was confined to production from an area covered by the original mining tenements as at the effective date, or whether the royalty extended to the mining of minerals on the new areas as well.

“Tenements” is defined very broadly in the deed as:

Tenements’ means “the Kathleen Valley Tenements and the Mount Harris Tenements and PL 36/1142 at Violet Range and any extension or variation or addition or replacement or substitution of any of them (whether or not also affecting other tenements or land outside the Area).

The dispute then turned on the construction of the definition of ‘Tenements’ in the GPR Deed. Technomin submitted that it had an entitlement to a royalty under the Deed on all minerals produced on the basis that the whole area fell within the definition of ‘Tenements’.

1          First Instance

At first instance, Justice Allanson rejected Technomin’s claim. His Honour determined to read into the definition of ‘Tenements’ a limitation that, in effect, the area of land affected by the definition could never extend beyond that which had applied at the time that the Deed was made.

The trial judge held that the definition of ‘Tenements’ was ambiguous; hence the context and commercial purpose of the GPR Deed were relevant in construing the meaning of the term. In determining the meaning of ‘Tenements’, the following surrounding circumstances were considered:

  1. a letter of agreement;
  2. antecedent joint venture agreements;
  3. the common practice of amalgamation of mining leases and tenements; and
  4. the permit holder’s capacity by its election to include or exclude additional tenements from the operation of the GPR Deed.

2 The Appeal

On appeal, Technomin argued that the ‘true rule’ in Codelfa is the law and, as the meaning of the language of the royalty agreement was unambiguously clear, evidence of surrounding circumstances should not have been admitted. On that basis, Technomin argued that the area of any replacement or substitute tenement, such as the new amalgamated tenement, became a “Tenement” for the purpose of the GPR Deed whether or not it also affected land or tenements outside that original area.

The respondents, however, argued that the High Court decision in Woodside had vindicated the pre-Jireh position adopted by those intermediate appellate courts that had abandoned the gateway requirement.

The Court of Appeal rejected that argument. It pointed out that the majority in Woodside had not addressed Jireh, and had not identified whether the relevant contract was ambiguous. Accordingly, President McLure found that, until the High Court expressly held differently, ambiguity remains a gateway requirement before surrounding circumstances can be considered.

The Court of Appeal also found that the definition of ‘Tenements’ was ambiguous and susceptible of more than one meaning and therefore the trial judge was correct to rely on surrounding circumstances as an aid to construction.

The Court of Appeal went on to consider the location and history of the subject mining tenements and took the following matters into consideration in construing the royalty deed without having to establish ambiguity, on the basis that these were contextual matters expressly referred to in the GPR Deed:

  1. the terms of related agreements; and
  2. the law governing the tenement interests.

Further, upon finding ambiguity, the court looked to the following surrounding circumstances:

  1. the extent of the existing adjoining tenement interests in the area;
  2. the nature of the tenement interests under the Mining Act 1978 (WA); and
  3. industry practice.

The court went on to provide five observations about the law post-Codelfa:

First, the passage in Codelfa (352) does not appear to have been subject of express consideration in the High Court since Royal Botanic [39]. Secondly, it might be thought that the authorities up to the time of Electricity Generation are not necessarily inconsistent with a requirement of ambiguity. Thirdly, a case as significant as Codelfa in the operation of the commercial law in Australia for over 30 years is unlikely to have been impliedly overruled. Fourthly, in Electricity Generation, French CJ, Hayne, Crennan and Kiefel JJ “reaffirmed^ the High Court’s earlier decisions. Electricity Generation does not appear to provide a departure from them. Fifthly, the question of whether evidence of surrounding circumstances is inadmissible in the absence of ambiguity does not appear to have been canvassed in argument in Electricity Generation, nor isolated for determination.[2]

In March 2015, the High Court had a further chance to provide some much needed clarity when Technomin brought a special leave application to appeal from the decision of the WA Court of Appeal. The appellant relied on the ground that an appeal would provide an opportunity for the High Court to settle the dispute between the intermediate courts as to the right approach to contractual construction. The High Court refused the application for special leave, and was quick to point out that all three appellate judges and the trial judge held that there was ambiguity, and so the true rule would not affect the outcome of the case whether or not it applied.

[1]  Namely 6 June 2014, from the date on which the reasons for decision Mainteck were delivered.

[2]   Technomin [2014] WASCA 164, [215].

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