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Wellington v Huaxin Energy (Aust) Pty Ltd (formerly Cuesta Coal Limited)  
Unreported Citation: [2019] QSC 18
EDITOR'S NOTE

This matter turned on the proper construction of a contract by reference to the principles underlying the implied duty of cooperation. The case concerned a contract for the sale of an exploration permit for coal, the related environmental authority and mining information. Part of the consideration for the sale was the issue of shares contingent upon a certain milestone being reached. The plaintiffs alleged that the implied duty of cooperation obliged the defendants to do all things necessary to give the plaintiffs the benefit of the contract and that required the defendants to carry out certain exploration work to determine whether the contractual threshold for the milestone had been reached.  Jackson J found that he did not accept that by the implied duty to cooperate the defendants had impliedly agreed to undertake whatever exploration work was necessary to ascertain whether the milestone had been reached.  Accordingly, in the circumstances, the duty to cooperate did not oblige the defendants to undertake that exploration work.

Jackson J

10 February 2019

Background

This proceeding arose out of a sale by the first and second plaintiffs, and a person who was later replaced by the third plaintiff, ("the Vendors") to the second defendant ("the Purchaser"), and a company that was later replaced by the first defendant, of an exploration permit for coal and the related environmental authority and mining information ("the Assets"). [1]. The plaintiffs claimed damages for breach of contract or a declaration that the contract was still on foot and capable of future performance. [1].

Clause 4.1 of the contract relevantly provided that the consideration for the purchase of the Assets included the issue of the Third Tranche Shares and the Third Tranche Options by the first defendant to the Vendors a number of days after the Third Milestone occurred. [16]. The "Third Milestone" was defined to mean "the date a Competent Person infers the existence of a Measured Mineral Resource with an estimated tonnage of 100,000,000 tonnes or more of coal in the Tenement Area". [17].

Clause 4.2 relevantly provided that if the Purchaser failed to meet the Third Milestone by the Third Milestone Date but a Competent Person inferred the existence of a Measured Mineral Resource with an estimated tonnage of at least 40,000,000 but less than 100,000,000 tonnes of coal in the Tenement Area as at the Third Milestone Date, then the first defendant was required to issue the Third Tranche Shares and the Third Tranche Options to the Vendors a number of days after the Third Milestone Date. [16].

The plaintiffs' primary case (their alternative case is not considered in this note) was that:

  1. "first, that it was an implied term of the final contract that the first defendant owed a duty of cooperation that required it to do all things necessary to give the plaintiffs the benefit of the [contract] and not to do anything that would derogate from the benefit of the [contract] ('implied duty of cooperation')"; and
  2. "second, that it was an implied term of the final contract that the first defendant would [conduct certain exploration work] sufficient for a Competent Person to undertake an analysis to calculate the measured mineral resource, provide that information to the Competent Person and obtain from the Competent Person the relevant calculation ('detailed and reliable exploration implied term')". [18].

It was not in dispute that, after the second defendant carried out certain exploration work, a Competent Person estimated an Inferred Mineral Resource of 364.1 Mt, but that after that the second defendant did not carry out further exploration work by way of drilling, sampling or testing, to further upgrade the mineral resource. [19]. The plaintiffs alleged that that was in breach of both of the implied terms. [20]. They submitted that the defendants should have undertaken a 21 hole exploration program ("proposed drilling program"). [39]. The defendants denied that any implied duty to cooperate required them to do any drilling, sampling or testing. [21]. They also denied that the detailed and reliable exploration implied term was a term of the contract. [21].

Implied duty of cooperation

The plaintiffs’ case was that "the duty to cooperate was imposed by implication upon the first defendant for the plaintiffs to have the benefit comprised in the Third Tranche Shares and Third Tranche Options to be issued, by doing acts such as the [proposed drilling program] to enable an assessment by the Competent Person that the contractual threshold of 100 Mt of measured mineral resource was present or, if not, that an amount of 40 Mt or greater was present". [42].

After reviewing the authorities, Jackson J concluded that the question in the present case was whether:

"the final contract on its proper construction impliedly obliged the second defendant to carry out the exploration work reasonably required to assess whether the Third Milestone was achieved or whether it left the second defendant at liberty to decide for itself whether any exploration work should be carried out, notwithstanding that the consequence of not doing so would be to disentitle the plaintiffs to the benefit of the promise to pay the Third Tranche Shares and Third Tranche Options if the Third Milestone was met". [66].

His Honour denied that the proper construction of the contract "must necessarily be parsed further, or again, through each of the five factors of the BP Refinery (Western Port) analysis as applied to the acts or omissions alleged to constitute breach of the duty of cooperation". [67].

After reviewing the evidence, his Honour did not accept that "the purchaser impliedly agreed by the implied duty to cooperate to undertake whatever work was necessary to ascertain whether there was a Measured Mineral Resource of 100 Mt or 40 Mt or above across the whole of the EPC, if that would require that many areas over the whole of the 130 sub-blocks must be drilled in the fashion of the [proposed drilling program]". [96]. His Honour held that the plaintiffs had failed to establish that the duty to cooperate required the defendants to do the work of, or such as, the proposed drilling program. [99].

Detailed and reliable exploration implied term

The plaintiffs alleged that the detailed and reliable exploration term was breached by the failure to conduct the proposed drilling program, to provide the information obtained to the Competent Person and to obtain the Competent Person’s calculation of the Measured Resource. [101]. The defendants submitted that there was no detailed and reliable exploration implied term because none of the five requirements of the BP Refinery (Westernport) case were satisfied. [102]. Jackson J held that the alleged implied term was not so obvious that it goes without saying, and was not capable of clear expression. [103][106].

Conclusion

In the result, the plaintiffs' claim was dismissed.

M J Hafeez-Baig