21 October, 2015
Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited
Wright Prospecting Pty Limited v Mount Bruce Mining Pty Limited [2015] HCA 37
WHAT YOU NEED TO KNOW
- The approach to contractual construction in Australia, under which evidence of extrinsic circumstances is only admissible where the terms of the contract are ambiguous, remains correct.
- The High Court has confirmed that commercial contracts should be interpreted in light of what a reasonable businessperson would have understood their terms to mean.
- Despite the law remaining unchanged, the High Court's decision may hint towards the Court taking a more commercial approach to the interpretation of contracts, including by reference to extrinsic materials.
Introduction
On 14 October 2015, the High Court handed down its decision in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited and Wright Prospecting Pty Limited v Mount Bruce Mining Pty Limited [2015] HCA 37, which concerned the payment of royalties by Mount Bruce Mining Pty Ltd (MBM) to Hancock Prospecting Pty Ltd and Wright Prospecting Pty Ltd (together, Hanwright). The decision provides an insight into the High Court's views on contractual construction and, more particularly, the proper approach to the construction of private mining royalty agreements.
Background
The case concerned a claim by Hanwright that royalties were payable by MBM in respect of ore mined from the Eastern Range and Channar A areas. Hanwright had originally been issued a number of temporary reserves under the Mining Act 1904 (WA) over these areas. Under a 1970 agreement between Hanwright, Hamersley Iron Pty Ltd (Hamersley) and MBM (1970 Agreement), those reserves were divided between Hanwright and MBM, with the reserves granted to MBM being referred to as the 'MBM area'. Under the 1970 Agreement, ore won by MBM from the MBM area was subject to the payment to Hanwright of a base royalty of 2.5% if mined by MBM, or 'all persons or corporations deriving title through or under' MBM to the MBM area.
The case turned on two main questions. Whether Eastern Range and Channar A were within the MBM area, and, if so, whether the ore mined at Channar A was mined by entities deriving title to the land 'through or under' MBM.
The second question arose because of the way the area covered by the Channar mining lease (ML 265SA) had been treated between 1970 and its eventual acquisition by Hamersley. Importantly in the result, a condition of the grant of ML 265SA was that MBM surrender two sections of ML 252SA, a mineral lease it held over an area that was originally covered by temporary reserves that were part of the MBM area. The remainder of the relevant area of ML 265SA was originally covered by temporary reserves that were part of the MBM area. Those reserves had been surrendered by MBM and the area was left unoccupied for a number of years before Hamersley Exploration, another member of the Hamersley Group, acquired rights of occupation in the late 1970s. In this way, there was no continuous chain of title connecting the mining lease covering Channar A to the temporary reserves that were originally held by MBM in the MBM area.
At first instance, the New South Wales Supreme Court upheld Hanwright's royalty claim in respect of both Eastern Range and Channar A, finding that they were both within the MBM area and that title to them had been acquired through or under MBM.
On appeal, the New South Wales Court of Appeal upheld the finding that the 'MBM area' referred to the geographical area covered by the temporary reserves, rather than the rights conferred by those reserves. Accordingly, both Eastern Range and Channar A were within the MBM area. However, on the second question, the Court of Appeal held that no obligation to pay royalty arose in relation to Channar A because title to that area was not acquired 'through or under' MBM. The Court of Appeal's decision rested on the finding that there was no unbroken chain of title linking MBM to Channar A.
MBM appealed against the Court of Appeal's finding that Eastern Range and Channar A were within the MBM area and Hanwright appealed against the finding that it was not entitled to receive royalties from Channar A because the relevant title was not obtained 'through or under' MBM.
What is the MBM area?
The High Court upheld the Court of Appeal's finding that the MBM area was defined by reference to the area of land fixed by the boundaries of the temporary reserves, not the rights held under those reserves. The plurality (French CJ, Nettle and Gordon JJ) found that this construction was 'the natural and ordinary understanding of the language used and is consistent with the commercial circumstances which the 1970 Agreement addressed and the purpose or object of the transaction it was intended to secure'.
Similarly, Kiefel and Keane JJ (with whom Bell and Gageler JJ agreed) held that the 1970 Agreement gave MBM the opportunity to obtain iron ore from land affected by the existing temporary reserves, but did not confine it to the rights which existed under those reserves at the time. Their Honours referred to the fact that temporary reserves are rights of 'temporary occupancy' and that 'the right to extract iron ore depended on the terms to be agreed with the State'. In their Honours' view, it would have been 'obvious' to the parties that the temporary reserves would be replaced by other tenements, such as mining leases, in order for the deposit to be developed and start generating royalties. This is a compelling line of reasoning and highlights the difficulty with MBM's argument that the MBM area, and the royalty obligation, were tied to the rights granted under the temporary reserves, rather than a geographic area.
The meaning of 'through or under'
The second, and more contentious, question considered by the High Court was whether ore mined at Channar A was mined by entities deriving title 'through or under' MBM. On this question, the High Court overturned the Court of Appeal's decision and held that MBM was required to pay royalties in respect of production at Channar A (approximately $85 million). The Court was unanimous in rejecting the Court of Appeal's construction of 'through or under' holding that 'through or under' did not mean the same thing as 'from', was not limited to formal succession, assignment or conveyance, and did not require proof of an 'unbroken chain of title'. There was, however, a divergence between the plurality (French CJ, Nettle and Gordon JJ) and the reasons of Kiefel and Keane JJ (which were supported by Bell and Gageler JJ).
The plurality held that the phrase 'through or under' did not require formal succession, assignment or conveyance. The plurality went on to analyse the language of the contract, and surrounding circumstances, that supported this construction. The plurality referred to the following.
- The fact the 1970 Agreement contemplated changes in the MBM area over time.
- The use of the term 'through or under' instead of 'from'.
- The parties' knowledge that the temporary reserves would be replaced by other types of tenure.
- MBM's surrender of temporary reserves as a condition of receiving the Channar mining lease (discussed further below).
- The commercial reality of mineral exploration and development, namely, that the extent of an orebody is unknown and is often dependent on work being done in an adjacent area.
The plurality did not, however, identify precisely how the Channar mining lease was derived 'through or under' title that was part of the MBM area. Rather, the plurality seems to have emphasised that the 'purpose' and 'commercial reality' of the 1970 Agreement resulted in the Hamersley group obtaining 'control over by whom, where and when the MBM area developed', including Channar A. The plurality was less concerned with precisely which entity within the Hamersley group developed Channar A, or how the tenure supporting that development was acquired.
Justices Kiefel and Keane focused more closely on how Hamersley Iron had acquired the Channar mining lease. Their Honours stated the issue as follows: 'The real question is whether ML 265SA [the Channar mining lease] affects an area of land title to which was a title deriving "through or under" MBM'. Their Honours concluded that because it was a condition of the grant of ML 265SA that MBM surrender sections 18 and 19 of ML 252SA, it was correct to say that title to ML 265SA was derived 'through or under' MBM. Their Honours then went on to identify a number of extrinsic factors which supported this construction, such as the indefinite duration of the 1970 Agreement and the parties' mutual knowledge that the temporary reserves would need to be converted into different tenure to enable further development. In this way, their Honours focused more closely on the chain of title connecting MBM to Channar A, rather than the plurality's approach of focusing on the fact that the whole area was controlled by members of the Hamersley Group.
The correct approach to the construction of contracts
Extrinsic circumstances
This case was thought to be an opportunity for the High Court to clarify the current state of the law regarding the role of extrinsic circumstances in interpreting contracts. The 'true rule' of construction, stated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352, is that evidence of surrounding circumstances is admissible to assist in interpreting a contract only if the language of the contract itself is ambiguous. Australian courts have, however, been increasingly willing to admit evidence of surrounding circumstances, leading the High Court in dismissing an application for special leave in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 to admonish lower courts and reinforce that the orthodox approach must be followed until the High Court revisits the issue.
In 2014, in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, the High Court made a statement which has been taken in some quarters as a move away from the 'true rule' in favour of a more contextual approach to construction. In the much scrutinised paragraph 35 of the Court's decision in Electricity Generation, it was stated that the meaning of a commercial contract is to be determined by what 'a reasonable businessperson would have understood those terms to mean', which requires consideration of the language, the surrounding circumstances and the commercial context. No reference was made to ambiguity. While the High Court did not clearly explain the status of Codelfa, Electricity Generation has subsequently been treated as allowing extrinsic material to be used to interpret a contract, even where the language is clear – the clearest example of this is perhaps the New South Wales Court of Appeal decision in Maintec Services Pty Ltd v Stein Heurey SA [2014] NSWCA 184.
Many had thought that Mount Bruce presented an opportunity for the High Court to clarify the interaction of the statement in Electricity Generation with the true rule set out in Codelfa, but it did not do so. Rather, the Court was at pains to point out that the case was not the occasion to address the question of whether it is essential to identify ambiguity in the language of the contract before having regard to the surrounding circumstances and the object of the transaction. This was because ambiguity arose from the language of the 1970 Agreement itself. As a result, the current state of the law remains unchanged.
Depending on the view you take as to the preferred approach to construing contracts, the decision can be read as providing support for your prevailing view. Those who favour a more contextual approach will point to the statement of Kiefel and Keane JJ (with French CJ, Nettle and Gordon JJ agreeing) that 'statements made in the course of reasons for refusing an application for special leave create no precedent and are binding on no one' as suggesting that at least five justices of the High Court have some doubts about the narrow approach taken in Jireh. Conversely, those who favour the classic approach will point to the statement of the plurality that 'if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning'.
Defined terms as labels
Another contentious aspect of the Australian law of contractual construction that arose for consideration in Mount Bruce is the role of the labels chosen for defined terms in construing the meaning of the terms themselves. The High Court has expressly rejected the approach on at least two occasions in the context of statutory interpretation: Wacal Developments Pty Ltd v Realty Developments Pty Ltd (1978) 140 CLR 503; Owners of the Ship Shin Kobe Maru v Empire Shipping Co Inc (1994) 181 CLR 404. However, the New South Wales Court of Appeal has recently adopted the approach on several occasions, including in its decision in Mount Bruce: see also Streller v Albury City Council [2013] NSWCA 348, [43]; Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368, [159].
While not addressed as part of the ratio of the High Court's decision, Bell and Gageler JJ referred with approval to the judgment of Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, 1112-1113, to the effect that, in the absence of background circumstances which indicate some reason to think otherwise, it should be assumed that words chosen as the label for a defined term are not chosen arbitrarily but as a distillation of a concept intended to be more precisely stated in the definition.
Their Honours appeared to consider that such an approach was not inconsistent with the position that had previously been taken by the Court in Wacal. Though not a binding change to the law of contractual construction, it appears that at least two members of
the High Court now support the view that the meaning of a defined term can be informed by the label chosen for the defined term itself.
Conclusion
Given that the High Court did not consider Mount Bruce to be an appropriate vehicle to clarify the perceived tension in the current approach to contractual construction in Australia, the law continues to be as stated in Codelfa and as further explained (apparently without modification) in Electricity Corporation.
However, the Court has given some hints that it may be embracing a move away from strict reliance on textual construction to an approach which gives due weight to the commercial context surrounding the contract. Such an approach would be in contrast to decisions like that in Jireh, where the focus was confined to the language of the contract, even where it led to an arguably uncommercial result.
For further information, please contact:
Lorenzo Pacitti, Partner, Ashurst
lorenzo.pacitti@ashurst.com
