The parties' intention must be assessed objectively
126 Usually it will be the parties to a contract who are in dispute as to whether an intention to be contractually bound actually existed. In the present case, neither party seeks to dispute the existence of a common intention to be bound to build the relevant works. Instead, it is a third party, ASIC, which asserts that the relevant intention did not exist. The trial judge referred to evidence from FMG executives, and CREC, CHEC, and CMCC executives, that all parties involved intended that the agreements be binding, and that they viewed the statements in the media releases, that the companies had entered binding agreements to build the infrastructure, as accurate. But whatever may have been the subjective intentions of the parties on either side of the framework agreements, the crucial question is whether they made a contract to build the infrastructure and this question must be answered by taking an objective view of the agreement. As Gleeson CJ said in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, at 549:
Where, as in the present case, the communications which the parties have exchanged are in writing, the question of their "intention" is, prima facie, to be resolved objectively, and as a matter of construction of the relevant documents.
127 In Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd, Gleeson CJ emphasised the importance of indications that the parties intended that the terms of their agreement should be resolved between them. At 551 his Honour stated that the communications between the parties revealed that:
[I]n a context where it was contemplated that there would be express agreement on a number of important matters which the parties had not yet got around to discussing, or in respect of which their discussion were still at a very incomplete stage, the parties had made an agreement on the most important subject of their transaction, that is, the price, in the confident expectation that they would in due course come to terms on the other issues that needed to be addressed.
128 In the present case, the ineluctable reality is that the works the subject matter of the agreements were not agreed. As I have noted above, during the hearing of the appeal, a question arose as to whether the PFS had been made available to the Chinese Contractors for their consideration before the first of the framework agreements, the CREC agreement, was signed. This issue had not previously been raised by the parties, and so the trial judge was not asked to make a finding on this issue. Consequently he did not do so.
129 The evidence adduced at trial is not clear as to whether Recital B to the framework agreement referred to the PFS. It was not clear on the evidence that the PFS had been made available to the Chinese Contractors before each framework agreement was signed. As I have said, it was not part of FMG's case at trial to show that the works the subject of the framework agreements were described in the PFS. That is hardly surprising because the evidence shows that the description of the infrastructure in the PFS had been supplanted, so far as FMG was concerned, by FMG's decision to shift the site of its principal mine from the location stated in the PFS for another mine site. On 20 July 2004, FMG announced to the ASX that it had moved the focal point of its mining operations from Mt Nicholas to Christmas Creek. This decision had inevitable consequences for the design and layout of the works and the cost of production which were the subject of consideration in the DFS.
130 In these circumstances, I am unable to accept FMG's contention that the framework agreements should be interpreted on the basis that the parties were ad idem that the subject matter of the Project was the work described in the PFS. Accordingly, I am unable to accept that, objectively speaking, the framework agreements expressed a common intention that the Chinese Contractors were bound to build the infrastructure for the Project without an agreed description of the works that formed the subject matter of the contract. It is theoretically possible that the Chinese Contractors might be taken to have agreed to construct, at their own initial expense, whatever infrastructure FMG might require for whatever price FMG might ultimately agree to pay. But the Court must be slow to attribute to the parties the intention to achieve such an uncommercial result.
131 It must be borne in mind that this was a large, speculative project which had spent years in planning stages and would spend years in construction and operational stages, and in relation to which the preparation of the DFS to identify the work necessary to build the infrastructure had not been completed. In this regard, in G R Securities v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, McHugh J said, at 634:
The magnitude, subject matter, or complexities of the transaction may indicate that the agreement was a limited one not intended to have legal effect: Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 316-317.
132 And in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd, Gleeson CJ said, at 548:
It is to be noted that the question in a case such as the present is expressed in terms of the intention of the parties to make a concluded bargain: see, eg, Masters v Cameron (at 360). That is not the same as, although in a given case it may be closely related to, the question whether the parties have reached agreement upon such terms as are, in the circumstances, legally necessary to constitute a contract. To say that the parties to negotiations have agreed upon sufficient matters to produce the consequence that, perhaps by reference to implied terms or by resort to considerations of reasonableness, a court will treat their consensus as sufficiently comprehensive to be legally binding, is not the same things as to say that a court will decide that they intended to make a concluded bargain. Nevertheless, in the ordinary case, as a matter of fact and commonsense, other things being equal, the more numerous and significant the areas in respect of which the parties have failed to reach agreement, the slower a court will be to conclude that they had the requisite contractual intention.
133 FMG's public announcements about the making of the framework agreements were widely publicised in Australia and China, and were reviewed by the leadership of both companies before and after publication, without objection or correction. The trial judge placed weight on these facts as indicators of the parties' objective intention (at [153] and [180]-[181]):
Despite widespread media coverage of the release in both China and Australia, there was no correction sought by CREC to the 23 August Media Release which by reference was incorporated as part of FMG's notification to the ASX. As is clear from the evidence of Field [Managing Director of Field Public Relations] who also attended the November 2004 ceremony, every relevant entity in the room saw the 5 November Letter. ASIC accepted in its opening that there was evidence that CREC approved the 23 August Media Release. Senior counsel for ASIC, in opening, also advised the Court that CREC did not seek to disabuse anyone as to the correctness of the content of the 23 August Media Release prior to the publication of the AFR Article.
…
At no point before 24 March 2005, despite this widespread coverage in Australia and China, was there any correction made to such reporting by any of the Chinese Contractors. Nor was there any correction made by the NDRC or any other Chinese government authority. Nor was there any qualification made to any of the reporting such as that government approval had yet to be forthcoming or that the agreements were conditional upon an equity arrangement being achieved between FMG and a Chinese entity.
I infer that CHEC and CMCC were satisfied that the content of the 5 November Media Release as well as other media reports in China were accurate.
134 It is hardly surprising that both sides to the framework agreements were eager to proclaim the success of their negotiations to that point. Any involvement on the part of the Chinese Contractors in the Project was a positive development, both for them and for FMG. That each side was enthusiastic about that involvement - and the potential benefits of that involvement - does not afford a reliable indication of the extent of the mutual involvement upon which they had actually achieved agreement. In this regard, it is important to bear in mind that the only statement by both sides of the terms on which they had actually reached agreement is to be found in the text of the framework agreements, including the recitals. I will discuss the effect of the recitals directly, but, for the moment, I note that the conduct of the parties does not suggest that the parties had agreed upon anything more than what was stated in the framework agreements. While it may be accepted that the parties' conduct made manifest an intention to "jointly develop and agree on…a General Conditions of Contract suitable for a Build and Transfer type contract" to build a port, railway, and process plant, there were necessary elements of the "contract" which they had in view, the content of which was not specified at all in the framework agreements, but upon which they intended to agree.
135 However compelling the evidence of each side's willingness to enter into a binding contract may be, the only operative statement of the content of the agreement which they had actually made is to be found in the text of each of the framework agreements. The content of the agreements as to subject matter, scheduling and price, was explicitly left to be agreed between the parties. The express terms of the framework agreements contemplate that the parties will seek to reach agreement on these matters. Those very terms are inconsistent with the fixing of the necessary content by the the Court's application of standards of reasonableness.
136 Lest it be thought that to adopt this view is to insist upon an unduly strict approach to the objective ascertainment of the common intention of the parties, it may also be said that there is substantial evidence which points to a conclusion different from that reached by the trial judge, both in respect of their objectively expressed common intention and even as to the subjective beliefs of FMG and Forrest. In an email dated 27 October 2004 from Forrest to Heyting and Huston, Forrest outlined his aims in relation to ongoing negotiations with the Chinese. The email was referred to in the primary judgment at [455] but his Honour did not explain what he made of it or how it was consistent with his conclusions. The email was in the following terms:
Ed [Heyting] pls carry the day in the formulation of these Construction Commissioning contracts with Peter [Huston], particularly with Alan [Watling - Chief Operating Officer and Head of Port & Rail] out of the country and me out of the State - relying on you both heavily. Peter, please draw on any support required within FMG.
So, let's go through the plan….
Mr Bai from China Rail (CR) is under pressure I believe to sign a detailed contract, as detailed enough to be binding on the total delivery of the project.
He demanded it on my last visit. It may well be possible, if we can get it to him tomorrow, that Alan can take him through it and resolve anything contentious when he meets with CR on Monday, for signing potentially shortly thereafter
While I am pushing for CR to
?take full responsibility for the commissioning and ramp up, ? a ceiling price of
A$600m with incentives, ?guarranteed schedule with shipments in 2006, ?ASO standards etc…
and these are all hard asks, due to the political pressure I sense CR is under - it may well be possible to execute this at the official ceremony after Alan has negotiated any deiscrepancies on Monday.
In fact, CR specifically requested this detailed contract execution, but may not have been aware that it could take place this quickly. He did however suggest we sign the detailed agreement at that China Harbours and MCC ceremony.
I believe he, Mr Bai from CR, will sign it. Then we start to really rock and roll!
The contract on its own must be able to deliver the project, not in itself but as The Key, binding others to take all necessary steps (like engineering design) to deliver it.
It must have sufficient detail in to really deliver the schedule, the financing and the project. It does not matter that other agreements still required are bound through this contract to be agreed but that this contract is the master and sets out what needs to be done.
137 Thereafter, negotiations ensued towards an "Advanced Framework Agreement" to supplement the Framework Agreement entered into with CREC on 6 August. Fortescue sent a draft of its version of the Advanced Framework Agreement to China on or about 2 November 2004, and received a reply shortly thereafter. The primary judge referred to this exchange of documents, concluding that the exchange of draft agreements strengthened FMG's case that CREC viewed the initial Framework Agreement as a legally binding agreement (at [459]):
In my view the additions proposed by CREC are powerful evidence that CREC regarded the CREC Framework Agreement as a binding build and transfer agreement for the railway. They also demonstrate that CREC regarded the CREC Advanced Framework Agreement as a further agreement toward the objective of concluding the "fuller and more detailed agreement" contemplated under cl 7 of the CREC Framework Agreement. I do not regard the negotiations in respect of the CREC Advanced Framework Agreement as evidencing that FMG and Forrest knew that the framework agreements were not binding.
138 Several aspects of the Advanced Framework Agreement sent by FMG contrast sharply with the response received from the Chinese side. First, the Chinese parties "weakened" the recitals. The original draft, sent by FMG, provided:
ADVANCED FRAMEWORK AGREEMENT
DATED______________2004
PART A - THE PARTIES
1. FORTESCUE METALS GROUP LIMITED (ABN 50 002 594 872) of Fortescue House, 50 Kings Park Road, West Perth in the State of Western Australia, Australia ("FMG"); and
2. CHINA RAILWAY ENGINEERING CORPORATION of Block B, CREC Mansion, Southern Square, Beijing West Railway Station, Beijing, in the Peoples Republic of China ("CREC").
PART B - THE BACKGROUND
1. China Railway Engineering Corporation has represented that it has the necessary skills, personnel and equipment to carry out and complete the design and construction of the Railway for the Pilbara Iron Ore and Infrastructure Project.
2. China Railway Engineering Corporation and Fortescue Metals Group Limited have negotiated in good faith with a view to entering into this agreement for China Railway Engineering Corporation to carry out and complete the design and construction of the Railway for the Pilbara Iron Ore and Infrastructure Project on the terms and conditions set out in this Document.
(Emphasis added.)
139 It can be seen that the Chinese side's response was to delete the statement that the parties have "negotiated in good faith with a view to entering to this agreement for [CREC] to carry out and complete the design and construction of the Railway":
RECITALS
A. By a framework agreement dated 6 August 2004 ("Original Date"), FMG accepted CREC's offer to carry out and complete the Build and Transfer of the Railway (The "Works") as defined in clause 4 for the Pilbara Iron Ore and Infrastructure Project (The "Project") upon the terms and conditions there set out ("Framework Agreement").
B. By a memorandum of understanding dated 1 September 2004 between CREC and BARCLAY MOWLEM CONSTRUCTION LIMITED (BM) agreed to enter into a joint venture for the purposes of undertaking the Works ("CREC").
C. The Parties now wish to enter into this Build and Transfer Framework Agreement Deed (the "Deed") in order to clarify various matters in the original Framework Agreement.
D. CREC may with the consent of FMG, appoint subcontractors or other joint venture partners who will be bound by the conditions of this Deed.
140 This change may be said to be relatively modest, given the fact that the Chinese parties included Recital A, but the remaining differences are compelling. For example, the Chinese altered the definition of "Performance Date". Originally, this term was defined in FMG's draft as:
the date when each of the following have been satisfied:
(a) the Works are complete except for minor defects;
(i) which do not prevent the Works from being reasonably capable of being used for their stated purpose;
(ii) which FMG determines CREC has reasonable grounds for not promptly rectifying; and
(iii) the rectification of which will not prejudice the reasonable and sensible use of the Works;
(b) those tests, which are required by the General Conditions of Contract to be carried out and passed before the Works reach practical completion (as that term is defined in the General Conditions of Contract) have been carried out and passed;
(c) documents and other information required under the General Conditions of Contract which, in FMG's opinion, are essential for the use, operation and/or maintenance of the Works, have been supplied to FMG or its nominee; and
(d) the Railway has carried iron ore at a rate of at least 143,000 tonnes per day for a period of 120 consecutive days.
(Emphasis added).
141 In the Chinese response, under the heading "Definitions and Interpretation" it is stated that:
xi. "Practical Completion" and "Date of Practical Completion" have the same meaning as stated in "2 INTERPRETATION" of General Conditions of Contract of AS4300
142 The General Conditions of Contract of AS4300 provide that "Practical Completion" means:
that stage in the execution of the work under the Contract when -
(a) the Works are complete except for minor omissions and minor defects -
(i) which do not prevent the Works from being reasonably capable of being used for their stated purpose;
(ii) which the Superintendent determines the Contractor has reasonable grounds for not promptly rectifying; and
(iii) rectification of which will not prejudice the convenient use of the Works;
(b) those tests which are required by the Contract to be carried out and passed before the Works reach Practical Completion, have been carried out and passed; and
(c) documents and other information required under the Contract which, in the opinion of the Superintendent, are essential for the use, operation and maintenance of the Works, have been supplied;
143 More important are the parties' conflicting proposals in relation to the "Value of the Work". In FMG's initial draft the relevant provisions were found in clause 4:
4 VALUE OF THE WORKS
1.1 The Parties agree to use their best endeavours to ensure that the Value of the Works is kept as low as possible and that in any event, the Value of the Works will not exceed AUD$600 million and that all costs, expenses or liabilities forming part of the Works will be incurred on an "at cost" basis without any mark up, addition or accretion whatsoever. The value of the works is expected by the Parties to not exceed AUD$600 million. In the unforseen event that the value of the works exceeds AUD$600 million, any such increase will be agreed only by a written variation between the Chairman of each of FMG and CREC.
1.2 CREC will provide FMG with full, open, unrestricted, immediate and transparent access to all details, data and information, however stored whether written or electronic, including without limitation, copies of all accounts, invoices, tenders, submissions, contracts, agreements, arrangements, notices or other information relating to all costs, expenses or liabilities forming part of the Value of the Works.
1.3 The Parties agree that in the event any savings in the completion of the Works result in the total Value of the Works falling below AUD$600 million, then CREC will be entitled to keep and retain for its sole account, one half of such savings.
(Emphasis added.)
144 Under clause 1, headed "Definitions and Interpretation", the FMG draft also provided that:
"Value of the Works" means the total cost of the Works including without limitation, all direct and indirect costs, expenses or liabilities of whatsoever type or nature and howsoever connected to the Works;
145 By comparison, the Chinese response deleted clause 4 entirely, replacing it with clause 3 headed "Financial Close":
3. FINANCIAL CLOSE
FMG shall arrange funding for the total value of the Project by a combination of equity and debt (obtained by the commitment of various reputable international financial institutions) prior to the execution of the Formal Agreement ("Financial Close").
146 Further, under their version of clause 1, the Chinese provided that "Value of the Works" was to mean:
the total cost of the Works including without limitation, all direct and indirect costs, expenses or liabilities of whatsoever type or nature and howsoever connected to the Works, and overhead and profit;
(Emphasis added.)
147 The exchange of draft agreements shows that the parties were not ad idem as to the manner in which the works were to be valued. Further, far from showing that the Chinese contemplated an agreement by which they were bound to secure financing, the amendments to the Advanced Framework Agreement show that they firmly believed securing finance was an issue for FMG.
148 Finally, the actual scope of the work remained vague. Clause 5 of FMG's draft repeated much the same terms as the original framework agreement:
5 SCOPE OF WORKS
The Scope of Works includes but is not limited to the following:
(1) earthworks for the foundations of the Railway including level crossings;
(2) civil works associated with the construction of culverts and bridges;
(3) above track works including ballast, sleepers, ties and rail;
(4) signals and communications;
(5) all rolling stock with the exception of locomotives;
(6) detailed engineering design of the Railway (to Australian Standards);
(7) project management and scheduling of the Works; and
(8) procurement, construction and commissioning of the Works.
149 It should be noted that aside from this clause the only other definitions in FMG's draft relating to the project were under cl 1 as follows:
"Project" means FMG's Pilbara Iron Ore and Infrastructure Project which is being established by FMG, further details of which are set forth in the stock exchange reports and the Annual Reports of FMG;
"Railway" means the railway (for the Project) which is to comply with the specifications, location, type, quality and concept drawings as notified in writing by FMG to CREC prior to the Commencement Date;
150 Each of these differences between the two draft documents evidences a rejection of what Mr Forrest recognised could be "hard asks". The Chinese rejected provisions that would have allocated to them the full risk of the construction of the Project. The differences also show that price is left at large for further negotiation and that the parties still had competing conceptions of what constituted the "value of the works". These differences also show that there was no reasonable basis for the claim in the ASX letters and associated media releases that the initial framework agreements contained a "fixed price" under which CREC had assumed "100 per cent of the risk". As is apparent, these issues were still very much a subject of negotiation as between the parties.
151 The real significance, for the resolution of the present issue, of the conduct of the parties subsequent to the signing of the framework agreements is two-fold. First, the correspondence to which I have referred shows how far the parties were from a real consensus on subject matter and price and the impossibility of bridging that gap by a court-imposed insistence upon good faith on both sides. There is no reason to suppose that either side was not negotiating in good faith or that the requirements of good faith in negotiation required either party to "subordinate its own legitimate interest to the interests of the other party": see Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 at [147]. Secondly, the correspondence contains not the slightest hint of an expectation that the wide gap between the parties should or could be bridged by recourse to the determination of a third party. In this regard, it strongly suggests "that it was not in the contemplation of either party that they were to be bound [to a contract to build and transfer the infrastructure] until all the essential preliminaries had been agreed to": see Barrier Wharfs Limited v W Scott Fell & Company Limited (1908) 5 CLR 647 at 669.
152 The trial judge resolved the issue as to whether the NDRC had approved the execution by the Chinese Contractors of the framework agreements before they were signed on the basis that he accepted as truthful the oral evidence to this effect of Mr Xin, who was familiar with the relationship between the NDRC and the Chinese Contractors (at [740]). I would not be disposed to take a different view on this issue from that taken by the trial judge. On the issue of the ongoing discussions as to the extent of Chinese equity in the Project and Mr He's attempts to obtain majority equity from FMG, the outcome of these negotiations may well have been seen, from FMG's perspective, as "merely a formality". However, the ongoing negotiations about the issue of the extent of Chinese equity in the Project also serve to emphasise the preliminary character of the framework agreements.