Centennial Coal Company Ltd v Xstrata Coal Pty Ltd

Centennial Coal Company Ltd v Xstrata Coal Pty Ltd - [2009] NSWCA 341 - NSWCA 2009 case summary — Zoe

[14]

Circumstances 3 Hunter is a subsidiary of Centennial, and one of a group of companies that has been referred to as the Centennial group. Mangoola is a subsidiary of Xstrata, and is one of a group of companies that has been referred to as the Xstrata group. Both the Centennial group and the Xstrata group own coalmines in the Hunter Valley. 4 Coal exported from the Hunter Valley is exported through the Port of Newcastle. At relevant times there were two coal loading facilities at that port, both operated by Port Waratah Coal Services Limited (PWCS). The lease pursuant to which PWCS held the facilities requires that they be maintained as a "common user" facility so that, in broad terms, it must be available to all shippers of coal under conditions and terms that are not discriminatory. Since about 2004, the volume of coal that producers wish to export from the Port of Newcastle has exceeded the port's capacity, giving rise to queues of vessels forming off the port. 5 In 2005, Newcastle Coal Infrastructure Group (NCIG) was formed for the purpose of building and operating a third terminal; and in April 2007, the New South Wales government gave conditional approval to this project. 6 The arrangements between NCIG shareholders were contained in a document referred to in this case as the Heads of Agreement, which was entered into on 10 June 2005 and amended in October 2005. Part B of the Heads of Agreement dealt with what was called the Design and Approval Period, this period commencing on the execution of an agreement for lease and ending on the execution of the lease of the terminal site (which occurred on 22 January 2008); and Part C of the Heads of Agreement dealt with the subsequent Construction and Operations Period. 7 At the time the Asset Sale Deed was entered into (17 September 2007), Centennial held 81 of 922 shares in NCIG; and the provisions of the Heads of Agreement applying at that time were those of Part B, which included clauses 11.5 and 11.6: 11.5 A Shareholder (Transferring Initial Shareholder) may at any time during the Design & Approval Period seek to transfer some or all of its holding of initial Shares (Transferring Initial Shares) by offering its Transferring Initial Shares (whether or not for consideration) to the other Shareholders pro rata in proportion to the Initial Shares held by such Shareholders. Any Transferring Initial Shares not acquired by the other shareholders as a result of such offer must then be offered pro rata to any other of the remaining Shareholders who accepted the first offer for Initial Shares on the same terms as they were originally offered. Upon the transfer of the Transferring Initial Shares, the Transferring Initial Shareholder must pay to NCIG that share of all funding amounts then owing to NCIG by the Transferring Shareholder (as contemplated in clause 8) equal to the proportion that the Transferring Initial Shares bears to all its Initial Shares.

[20]

A Party must not assign or otherwise deal with this Agreement or any rights under this Agreement without the consent of the other Parties. 10 In June 2007 PWCS announced that it would apply to the government to amend the "common user" provisions with effect from January 2010, so as to give preference to customers not having access to the NCIG facility. That application was opposed by NCIG, and has not been acceded to by the government. 11 As at August 2007, Hunter had recently received approval to develop an open-cut coalmine known as Anvil Hill in the Hunter Valley. 12 On 21 August 2007, Xstrata wrote to Centennial proposing a purchase of Centennial's interest in the Anvil Hill project and in another mine for $1 billion, the purchase of the Anvil Hill project to include "Centennial's interest in the NCIG project" (Blue 264). 13 Subsequent to that letter, Centennial advised Xstrata of difficulties in including its NCIG interest in such a sale, and Xstrata's solicitors inspected the Heads of Agreement (Black 3). 14 On 30 August 2007, Xstrata wrote again to Centennial, with an increased offer of $1.06 billion, and among other things this letter stated: 3. In view of Centennial's stated difficulties in including its NCIG interest as originally contemplated, Xstrata is willing to discuss this further to find a mutually acceptable solution. 15 In the result, the Asset Sale Deed was entered into on 17 September 2007 between Hunter (described in the deed as the Seller), Centennial (described as the Seller's Guarantor), Mangoola (described by its former name as the Buyer) and Xstrata (described as the Buyer's Guarantor). 16 The Asset Sale Deed provided in cl 3.1 for the sale by the Seller and purchase by the Buyer of the "Anvil Hill Assets" for the "Anvil Hill Purchase Price", the latter being something over $400 million. The Anvil Hill Assets were a number of identified assets, not including the NCIG Arrangements, which were defined as follows: Any interest and/or entitlement of the Seller's Guarantor (however described, howsoever arising and of whatever nature) under, in and to:

[69]

[17] A "Qualifying Third Party" is a person (proposed SoP Shipper) that has marketable coal reserves sufficient to enable the proposed SoP Shipper to meet its obligations under a ship-or-pay agreement in respect of the proposed capacity entitlement if it were to become an SoP Shipper, jointly with a proposed shareholder that is a related body corporate of the proposed SoP Shipper. Schedule 7 prescribed a procedure for the invocation of the pre-emptive rights of the existing shareholders in the event of a proposed transfer of shares and Ship-or-Pay Agreements, relevantly providing that: Proposing transferors must give an assignment notice to the company, specifying the number of the subject interests, the transfer price (which must be a cash price) and all other terms of payment, accompanied by the certificate for the shares held by the shareholder and the ship-or-pay agreement between the affiliated SoP shipper and NCIG; The company must give an offer notice to each shareholder and its affiliated SoP shipper(s) collectively, other than the proposing transferors, offering the subject interests for sale at the transfer price on the basis that each shareholder and affiliated SoP shipper collectively have a right of first refusal in respect of its initial allocation and on terms that if not accepted within 30 days the offer was taken to have been declined, and may be accepted for all or some only of the offeree's initial allocation; A shareholder and its affiliated SoP shipper collectively may exercise the right of first refusal by giving to the company within the offer period an acceptance notice and the transfer price, and may add an offer to buy additional shares at that price; The Board must allocate any subject interests not accepted by shareholders who had a right of first refusal amongst those that included offers to buy additional subject interests; If the Board has not allocated all subject interests to other shareholders and affiliated shippers within 90 days after the assignment notice, it may not dispose of any of them and the company must immediately repay any amounts paid by shareholders and their affiliated shippers for the transfer price and return the share certificates to the proposing transferors; If within 90 days after the assignment notice the company has not allocated all subject interests to other shareholders and their affiliated shippers or qualifying third parties, the proposing transferor may transfer the shares and novate its ship-or-pay agreement or so much as has not been allocated by the Board to qualifying third parties at the transfer price and otherwise on terms no less favourable than those set out in the assignment notice.

[73]

Decision of primary judge 25 So far as relevant to the appeal, the primary judge noted the appellant's submissions as follows: [20] Centennial Coal and Hunter submit that Centennial Hunter has been discharged by performance of its obligations under cl 8.6(a), (b) and (c) of the Anvil Hill Asset Sale Deed, and alternatively is relieved from further performance, by reason of breach by Mangoola of those provisions. In essence, this submission proceeds as follows: although no novation or transfer had occurred as at completion on 17 October 2007, they could only have occurred if all other parties to the NCIG Heads of Agreement agreed to waive the provisions of cll 11.5 and 11.6, which did not permit the transfer of shares to third parties during the Design & Approval Period; the entry by Centennial Coal and its subsidiaries into the NCIG Shareholders Agreement and the Ship-or-Pay Agreement involved no breach by Centennial of any obligations under 8.6(c), but happened in accordance with Centennial's existing contractual obligations under the NCIG Heads of Agreement; after 15 January 2008, when the NCIG Shareholders Agreement was finalised, the only way in which the shares and Ship-or-Pay Agreements could be transferred to Mangoola was in accordance with the Sch 7 procedure; in circumstances where the shares could not be transferred except pursuant to the Sch 7 procedure, Centennial Hunter's obligation under cl 8.6(b) to "use all reasonable endeavours" (or to procure that CCI do so), required no more than seeking to effect a transfer in accordance with the Sch 7 procedure; Centennial Coal and Hunter have endeavoured to do precisely that, but Xstrata Mangoola has refused to cooperate by providing the requisite information to enable the preparation and giving of an assignment notice; in those circumstances, Centennial Hunter has done everything it is reasonably able to do to produce a real chance of achieving the transfer and novation and is discharged from further performance of cl 8.6(b), or alternatively Mangoola is in breach of its obligations under that clause, which breach relieves Hunter from further performance; the obligations in cl 8.6(c) are subsidiary to the "paramount" obligations in cll 8.6(a) and (b) and are intended only to preserve the utility and value of the rights and obligations in shares the subject of cll 8.6(a) and (b) while the obligations in those clauses continue, and as those obligations have been discharged so too are the obligations under cl 8.6(c). 26 He gave the following reasons for rejecting these submissions: [25] As Mr Meagher SC for the plaintiffs emphasises, cl 8.6(b) is not, in terms or in effect, an obligation to "ensure that the novation and transfer occurs as soon as reasonably practicable"; it is an obligation to "use all reasonable endeavours" to that end.

[103]

Submissions 28 In addition to relying on submissions similar to those made to the primary judge, Mr Meagher SC for the appellants submitted that the NCIG Arrangements were not included in the assets sold under the Asset Sale Deed, and that accordingly the question of what was required by way of "reasonable endeavours" by both Hunter and Mangoola was to be approached on the basis that Mangoola had not purchased any entitlement to the NCIG Arrangements but rather was, along with Hunter, obliged to use reasonable endeavours to bring about a novation to Mangoola of the rights and obligations of Centennial under those Arrangements. Accordingly, where the only practical way in which such a result could be achieved was by going through the procedure for transfer of rights and obligations provided for under the NCIG arrangements, Mangoola's obligation to use all reasonable endeavours extended to an obligation to offer to Centennial a price for those rights and obligations which, if Centennial was prepared to accept that price, could be the basis for going through the pre-emption procedure and, if pre-emptive rights were not exercised, enable a transfer of the rights and obligations to Mangoola. 29 Mr Meagher submitted that cl 8.6(b) provided that, if this not be achieved on Completion, then both Mangoola and Hunter had to use all reasonable endeavours to ensure that the novation and transfer occurred as soon as reasonably practicable after Completion, disclosing an intention that this was something to be achieved within a reasonable time of completion, and not to be left unresolved indefinitely; and accordingly, he submitted, cl 8.6(c) was not a provision having an indefinite independent life but rather was a temporary provision to hold the position during the limited time while the result contemplated by cl 8.6(b) was being sought. This confirmed that the reasonable endeavours of Mangoola did extend to doing what for its part was required to bring about the result, namely participating in the pre-emption process. 30 Mr Meagher further submitted that cl 8.6(c) could not reasonably be considered as having indefinite operation in circumstances (known to all parties) where Centennial had to make take or pay commitments in order that it become entitled to capacity at the NCIG terminal pursuant to the NCIG Arrangements, and there was no provision in cl 8.6 giving Mangoola or Xstrata any obligation to make any payment, undertaking or commitment or give any indemnity. He submitted that this was an uncommercial position that could not have been intended; and it also contrasted with the provision made in cll 7.3 and 7.4 for appropriate payments and indemnities. Mr Meagher also referred to cl 2 as an example of how the parties spelt out the operation of conditions, counting against the existence of any implication to overcome the uncommercial operation of cl 8.6(c) on the construction found by the primary judge. 31 Mr Meagher then submitted that the primary judge erred, in particular, in holding to the effect that the obligation to use all reasonable endeavours to achieve the desirable result extended only to measures certain to achieve that result, whereas he should have held that it extended to taking measures capable of achieving that result, even if they were not certain of achieving that result or would not on the balance of probabilities achieve that result; and he referred to IBM United Kingdom Limited v Rockware Glenn Limited [1980] FSR 335 and O'Rourke v P & B Corporation Pty Limited [2008] WASC 36; (2008) 36 WAR 197. 32 Mr Meagher also submitted that the primary judge was in error in considering that activation of the pre-emptive process could be a breach of Centennial's obligations under cl 8.6(c), because such obligations were "subject to existing contractual obligations", which included the obligations of Hunter and Mangoola to use reasonable endeavours to effect the novation and transfer referred to in cl 8.6(a) and (b); and in circumstances where, on its true construction, cl 8.6(c) was to facilitate compliance with cl 8.6(b), it could not be a breach of Centennial's obligation for it to engage in the pre-emption process. 33 Mr Meagher accordingly submitted that Mangoola's breach of its obligation under cl 8.6 discharged Centennial and Hunter from further performance of cl 8.6; or at least, in circumstances where, but for Mangoola's wrong there would not be an occasion for further performance of cl 8.6, that for Mangoola to seek further performance would be impermissibly to seek to rely on its own wrong.

[104]

Decision 34 In my opinion, no error is shown in the reasoning of the primary judge, with which I generally agree. 35 I accept Mr Meagher's submission that the Asset Sale Deed does not specify the NCIG Arrangements, or rights thereunder, as being included in the assets sold by that agreement; but that does not significantly support the view that the agreement manifests an intention that Mangoola was to pay more for whatever it was to receive under cl 8.6. Plainly, in my opinion, if reasonable endeavours could have brought about a novation through agreement of the other parties to the NCIG Arrangements, without the need for any payment, Mangoola should have received the benefit of that novation without having to pay any more for rights under the NCIG Arrangements. It was a common understanding of the parties at the time of the Asset Sale Deed that the agreement of other parties to the NCIG Arrangements to such a novation could not then be obtained; but in my opinion that was insufficient to justify reading the requirement that Mangoola use reasonable endeavours as extending to a requirement that it pay some additional price. 36 In the implementation of the pre-emption provisions, a price that might be offered by Mangoola would not be a basis for proceeding with the pre-emption process unless Centennial was prepared to accept that price. There is no market for the rights and obligations under the NCIG Arrangements and no apparent basis for determining what would be a reasonable price which Mangoola would be required to offer as part of reasonable endeavours on its part, or which Centennial would be expected to accept as a result of reasonable endeavours on Hunter's part. And since it could be anticipated that other NCIG participants, who included BHP controlled companies, might be prepared to exercise pre-emptive rights if the price was "reasonable" (whatever that might mean) to give them a competitive advantage over Xstrata, it is in my opinion more difficult still to determine what price "reasonable endeavours" would require Mangoola to offer. This fundamental uncertainty counts against the construction argued for by Mr Meagher. 37 I accept Mr Meagher's submission that reasonable endeavours may require action that is not assured of success, and may in some circumstances require action that has not a better than even chance of success; but this would rarely be so if lack of success would mean total loss of the asset sought to be transferred. This consideration applied particularly strongly in this case, where there is a positive obligation imposed by cl 8.6(c) to preserve the asset. 38 There is some force in Mr Meagher's contention that there is no spelling out in cl 8.6(c) of any entitlement of Centennial to be indemnified against loss from undertaking whatever commitments or liabilities might be required by cl 8.6(c)(4). However, in my opinion that concern is met by the fact that what cl 8.6(c) requires is only that Centennial "use reasonable endeavours" to make the capacity referred to in cl 8.6(c)(4) available; and for Centennial to do what was required to make that capacity available to Mangoola without Xstrata and/or Mangoola giving appropriate undertakings and/or indemnities would in my opinion go beyond "reasonable endeavours". 39 The view of the primary judge has further support from the consideration that the obligation under cl 8.6(c)(4) to "make available capacity" suggests that the parties envisaged that this obligation could still be in force when the NCIG terminal came into service and for some time thereafter, in circumstances where it was not expected that the NCIG terminal would come into service until the second half of 2009. This counts against cl 8.6(c) being regarded as a temporary measure simply to support cl 8.6(b). Mr Meagher submitted that cl 8.6(c)(4) related to supporting Centennial's entitlement to the capacity during an interim period; but the language used is that capacity be made available, suggesting an intention that the provision operate when the capacity is there to be made available. 40 Another reason counting against Mr Meagher's submission is that what cl 8.6 contemplates is novation of rights and obligations as well as transfer of shares; and novation means the making of a new agreement by existing parties and a new party. A mere transfer of rights following implementation of the pre-emption provision would not be a novation at all; and thus engaging in the pre-emption process would not be using reasonable endeavours to achieve a novation, but rather would be using endeavours to achieve something else other than a novation. 41 Although it is not necessary to have regard to pre-contractual correspondence or post-contractual correspondence, in my opinion this gives further support to the primary judge's view. 42 As regards pre-contractual correspondence, it can at most be used as part of the objective circumstances known to the parties against which the intention manifested by their signing of the agreement is to be understood. One circumstance is that Xstrata made an offer to purchase assets including Centennial's interest in the NCIG project, and that after the restraint on transfer of that interest was made known, there was a further offer from Xstrata at a slightly higher price, on the basis that there would be further discussions to find a mutually acceptable solution. This tends to support an inference that cl 8.6 was that mutually acceptable solution. 43 As regards post-contractual correspondence, this bears on Mr Meagher's submission that it could not have been intended that cl 8.6(c)(4) operate indefinitely into the future, because this would be uncommercial. Arguments as to interpretation of contracts based on uncommerciality must, in my opinion, turn at least in part on what the Court thinks the common understanding of the parties as to the commerciality of the arrangement was at the time it was entered into, which would reflect back on to what understanding was manifested by their conduct. If that is right, then evidence going to the parties' common understanding at a later time as to the commerciality of the arrangement, on the relevant construction of it, would be relevant to their actual common understanding at the time of the contract, relevant in turn to what understanding was manifested by their conduct, and thus relevant to arguments based on considerations of commerciality. Centennial's letter of 29 November 2007 and Xstrata's response to it indicate a common understanding that it was not uncommercial for Centennial to undertake commitments so as to make available to Mangoola capacity at the NCIG terminal, on the basis of appropriate reciprocal commitments by Xstrata; and this in my opinion further undermines Mr Meagher's arguments based on considerations of uncommerciality. 44 For those reasons, in addition to the reasons advanced by the primary judge, in my opinion the construction adopted by the primary judge was correct. It is accordingly unnecessary to consider submissions concerning the effect of breach of cl 8.6.

At a glance

Court

Decision date

Before

Source

Judgment (106 paragraphs)

Parties

Cases Cited (4)

Cited By (5)