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NZ Contractual Interpretation Case Law Development - L&M Coal v Bathurst



The High Court of NZ 2018


Dobson J in L&M Coal v Bathurst CIV-2016-485-1007 [2018] NZHC 2127 decide that Bathurst owed L&M Coal US$40 million along with interest and costs. The 66 page judgement while dealing with many things, is notable (to me) for deciding three key questions;

(1) what is the meaning of the word “shipped” when interpreting the contract;

(2) were Bathurst entitle to a discretion to withhold a US$40 million payment due, if it paid higher royalties per an amendment to the contract; and

(3) in the event it was uneconomical to mine coal, exercise the non-payment discretion and pay only notional royalties for small sales of stockpiled coal?


The case considered the argument for the possibility of an implied term being necessary, the balance to be struck in law between the application of Interpretation and Implied terms, the admissibility of extrinsic evidence when interpreting the intentions of the parties, notable to which was considered the evidence of the two original negotiators (actors) for each party, who both gave evidence siding with L&M Coal as Plaintiff. Dobson J in writing, gave a thorough accounting of the arguments and his rationale for the application of interpreting the agreement, resolving what evidence to rely upon, and what to set aside, and why.



Background


L&M possessed coal mining rights and sold these to Bathurst, who would raise capital and operate the mine and pay L&M a significant upfront (US$30M) and 2 x milestone payments, (US$40M each), along with residual royalties per tonnage shipped on a sliding scale (like a retention’s sliding scale). Bathurst struggled to meet conditions of raising finance and with delays in resource consents. L&M made several amendments to the agreement and did other things to assist Bathurst in meeting its obligations to deliver coal with the resulting income it would produce for both parties.


A contract amendment set aside L&M’s right to sue for delayed milestone payment #1 US$40M if royalty payments continued at a higher %. The trigger for this milestone payment was shipping the first 25,000 tonnes of coal. After 50,000 tonnes had been transported from the mine, Bathurst maintained the milestone payment was not due because the tonnes were for local thermal sales and not the sales intended by the parties for Coking Coal sold offshore, to be “shipped” by sea.


Bathurst subsequently maintained they were not obliged to run an uneconomic business and ceased production when global coal prices fell off a cliff. This led to only notional coal sales of stockpiled thermal coal advancing only notional royalties being paid to L&M, albeit at a higher rate to satisfy the concession L&M gave earlier not to sue for the US$40M, now overdue.


Bathurst also concurrently pursued significant other coal / mining investments in NZ.



The NZ Court of Appeal 2020


Kós P, Gilbert and Goddard JJ judgement, CA483/2018 [2020] NZCA 113, (33 pages) was delivered by Kós P, dismissing the appeal of Bathurst but decided similarly on some points and a little more straight forwardly on others compared to Dobson J of the High Court.


The issues on appeal were

1. What is the correct meaning of “shipped from the permit areas”?

2. What is the true effect of the amendment granting delay to debt pursuit by L&M in return for higher royalties paid by Bathurst?

3. Should a term be implied requiring Bathurst’s increased rate of royalty payments to be more proportionally substantive than notional?


The Court of appeal gave a useful dissertation on current position of NZ Courts on “The Interpretation of Contracts” in [32] through to [48] (7 pages). Seven pages worthy of closer study by all who attempt to interpret a construction contract in NZ. [Edited] extracts from the judgement follow;



Deciding issue 1 - the correct meaning of “shipped from the permit areas”?


[51] The issue in short is whether coal is “shipped from the Permit Areas” when it leaves the boundaries of the permit areas (by truck) or if it also requires that it be carried by ship (exported).


[56] The [High Court] Judge then referred to dictionary definitions of the word “shipped”, concluding that these were capable of supporting both positions urged by the parties. Context, as is commonly the case, was everything then. The Judge went on to say: [42]

… Unless the context signals to the reader that passage of goods by sea is contemplated,

without more it is not appropriate to confine its interpretation to transport on board a sea

going vessel. The context here is the transport of a bulk cargo from a land-locked area on the

west coast of the South Island. Coal could never be “shipped” in the narrow sense from the

boundaries of the permit areas. On the other hand, if the buyer of the coal was outside New

Zealand, carriage for the sea leg of its delivery to the buyer would inevitably be by ship.


[60] We do not accept Bathurst’s submissions on Issue 1. Nor do we consider the [High Court] Judge erred in the conclusion he reached that the word “shipped” in cl 3.4 meant, simply, “transported”. In short, while the focus of the project was export coking coal, it was not the project’s exclusive focus. An objective observer, cognisant of context, would not conclude that the words “coal … shipped from the Permit Areas” were merely a mangled description of export tonnages. Had liability for the first performance payment depended on export tonnages, a more sophisticated formulation to identify timing would necessarily have been adopted.



Deciding issue 2 - What is the true effect of the amendment granting delay to debt pursuit by L&M


[93] [], [W]e consider that an objective observer appreciating the context and economic dynamics of the primary sale agreement would infer that the amendment proceeded on the shared assumption that continuing payment of royalties (only), at the higher rate, would have to compensate L&M for the delay in receiving US$40 million due and payable. And, that the suspension of L&M’s cl 9.7 rights would only exist if royalty payments “continue”. The objective observer would fix on the words “for so long as the relevant royalty payments continue to be made”. What do those words mean?


[96] We take the clear view that the observer would take the words “for so long as the relevant royalty payments continue to be made” to mean that [“]the debt would not be payable so long as L&M continued to receive royalties from continuing mining and sales at a level not materially less than had resulted in the US$40 million payment being triggered in the first place[“]. That would provide commercially realistic compensation to L&M for the delay in receipt of the performance payment. Otherwise, the agreement would have made no commercial sense at all from L&M's perspective. By contrast, the objective observer would not have thought the words were intended to enable Bathurst to (as we put it earlier) effectively place payment of a US$40 million debt on ice indefinitely, while mining ceased and merely nominal royalties only were paid in respect of sales from a stockpile, for so long as that stockpile remained.


[97] In context, the requirement that “relevant royalty payments continue to be made” is not met by merely nominal royalties from sales from a stockpile of coal left after mining has ceased. Any other interpretation would be devoid of commercial sense and cannot be what the words mean.



Deciding issue 3 - Should a term be implied requiring Bathurst’s increased rate of royalty payments be more proportionally substantive than notional?


[103] The [High Court] Judge was critical of that pleading, describing it as far more elaborate than necessary. Whether or not that is so need not detain us. We have found the essence of the implication advanced to be embraced already by the [interpretation of this court of the] express words “relevant royalty payments continue to be made” in cl 3.10. The implication of a term is unnecessary.


Supreme Court Appeal to follow


The Supreme Court of New Zealand, SC 29/2020 [2020] NZSC 73, has granted leave to Bathurst to Appeal the question “whether the Court of Appeal was correct to dismiss the appeal”.


[1] To assist counsel in preparing for the appeal, the Court notes the following points:

(a) The principles of contractual interpretation have been set out by this Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd (Zurich). We will not revisit those principles on this appeal.

(b) Zurich did not deal with the admissibility or otherwise of evidence of prior negotiations or subsequent conduct. 2 We will hear argument on these issues.

(c) We will hear argument on the distinction between interpretation and implication and the appropriate test for the latter.


Editorial Commentary


The Court of Appeal Interpretation of "shipped". “Shipped” typically means “transported” unless the context indicates otherwise. See [Define Shipped].


The efficacy the Court of Appeal, in expanding the definition of the words “for so long as the relevant royalty payments continue to be made” is supported by considering the plain meaning of the word “relevant”.


Relevant – [meaning].. closely connected or appropriate to what is being done or considered, appropriate to the current time, period, or circumstances; of contemporary interest. See [Define Relevant].


“We often seek the elegance of conciseness at the expense of the verbiage gift of distinct clarity. Ultimately, to interpret what is relevant, is all that matters.”


Where the Court of Appeal states at [96], "take the words “for so long as the relevant royalty payments continue to be made” to mean that [“]the debt would not be payable so long as L&M continued to receive royalties from continuing mining and sales at a level not materially less than had resulted in the US$40 million payment being triggered in the first place[“]." The Court of Appeal has expressed words that contextualises the ordinary definition of "relevant". The word "relevant" means in close context as opposed to remote context. The more remote the context the less likely it is what the parties intended in a business context.


The Court of Appeal have applied what Richard Calnan refers to in his Book "Principles of Contractual Interpretation. Second Edition", as Contract Interpretation Principal #8 Implied terms. "Words are implied into a contract if the parties must objectively have intended them. This will be the case either if they are so obvious that there was no need to express them, or if they are necessary to make the contract work in a business context."


The words the Court of Appeal have implied, make perfect business common sense and do not offend the objective interpretation of the express terms of the contract. It is interesting to note the Supreme Court will hear argument on the distinction between interpretation and implication and the appropriate test for the latter. My view is that the implied words expressed by the Court of Appeal both "go without saying" when you consider the definition of "relevant" and are necessary to make the contract work in a business context under the circumstances encountered. "The express words mean this under these business circumstances"


[L&M v Bathurst Courts of New Zealand Link]


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