Cumnock No. 1 Colliery P/L v Pacific Power & Anor

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40018 of 2002 ED 50008 of 2000

MEAGHER JA HANDLEY JA FOSTER AJA

Wednesday, 2 September 2002 CUMNOCK NO. 1 COLLIERY PTY LTD v PACIFIC POWER & ELCOM COLLIERIES PTY LTD

In 1991, the appellant, Cumnock No 1 Colliery Pty Limited ("Cumnock") purchased the Liddell State Coal Mine from the respondents. Various contracts were executed between the parties in relation to the purchase, namely, a Deed called the Royalty Deed, and an agreement called either the Supply Contract or Contract No 4180. The Coal Supply Contract was for a term of three years, expiring on 5 November 1994, and required the appellant to supply to the first respondent ("Pacific Power"), certain tonnages of coal at certain rates. The combined effect of the Royalty Deed and the Supply Contract was that, the respondents would have an income stream consisting partly of royalty payments and partly by the discount built into the scheduled price of coal obtained by the appellant. Clause 11 of the Royalty Deed provided that any variation of the Deed must also be by Deed.

On 23 May 1993, the second respondent, Elcom Collieries Pty Ltd, sold to the first respondent all its rights, title and interest under both contracts in consideration of a payment of $18.3 million. The respondents' documents indicated that they calculated the value of the income stream to be $9.6 million. While the parties performed the contracts for a period of time, it was not long before they both found that the deal they had consummated was not wholly satisfactory. The Supply Contract was effectively varied by an interchange of letters ("the February letter" and "the May letter"), but the parties were in dispute as to whether the Royalty Deed had also been varied.

On appeal, the appellant submitted (i) that the case was one which fell into the third category of Masters v Cameron (1954) 91 CLR 353; (ii) that clause 11 of the Deed of Royalty required that any variation of the Deed must also be by Deed.

Held Per Meagher JA (Handley JA & Foster AJA agreeing) (i) The parties acted, and obviously intended to act, as if they were bound by a contract, even although the formalisation of that contract (which they both anticipated) had not yet occurred. (ii) Parties can hardly be taken by a clause such as clause 11 to be depriving themselves of their own liberty to contract. (iii) It was open to the trial judge to hold that the contract was "one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms": Sinclair, Scott & Company Limited v Naughton (1929) 43 CLR 310 at 317. Orders Appeal dismissed with costs.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40018 of 2002 ED 50008 of 2000

MEAGHER JA HANDLEY JA FOSTER AJA

Wednesday, 2 September 2002 CUMNOCK NO. 1 COLLIERY PTY LTD v PACIFIC POWER & ELCOM COLLIERIES PTY LTD

Judgment 1 MEAGHER JA: This is an appeal by the defendant Cumnock No 1 Colliery Pty Limited ("Cumnock") against a judgment by Bergin J. Cumnock was formerly called Stocklyn Pty Ltd. It purchased the Liddell State Coal Mine from the respondents in 1991. A number of contracts were executed between the parties in relation to the purchase. In particular, there was a Deed called the Royalty Deed, and an agreement under hand called either the Supply Contract or Contract No 4180. 2 The vendor was the second respondent Elcom Collieries Pty Ltd, a subsidiary of the first respondent. On 21 May 1993 it assigned all its contractual rights and interests to the first respondent, Pacific Power, the statutory reincarnation of the old Electricity Commission of New South Wales. Nothing turns on the assignment, or on the differences between the two respondents. 3 Cumnock accepts that the Supply Contract was effectively varied by an interchange of letters dated 2 February 1994 ("the February letter") and 30 May 1994 ("the May letter"), but asserts that the same interchange did not vary the Royalty Deed. The respondents contended that both contracts were varied. 4 The facts which are relevant to the present case are not many, so I shall not endeavour to recapitulate all the factual material set out carefully and thoroughly in her Honour's judgment. 5 However, it is necessary to set out some of the provisions of the basic documents. Clause 2.1, 2.2 and 2.3 of the Royalty Deed are in the following terms: 2. ROYALTY PAYMENTS 2.1 Payments Subject to this Clause 2.1 Stocklyn covenants to pay to Elcom: (a) a royalty of 5% of the Royalty Price Per Tonne for each ROM tonne (or equivalent ROM tonne where any LS Coal is sold on a non ROM basis) of LS Coal sold and delivered during each Royalty Period; and (b) a royalty of $0.30 per tonne for each tonne of BS Coal sold and delivered during each Royalty Period. Stocklyn shall not be required to pay to Elcom the royalty in paragraphs (a) and (b) for Stockpiled Coal. 2.2 Time of Payment Royalty Payments for a Royalty Period shall be due and payable by Stocklyn to Elcom at any time prior to the expiry of the next succeeding Royalty Period. Stocklyn shall send to Elcom at the time of payment of each Royalty Payment a certificate, signed by a director or the secretary of Stocklyn, setting out the following details: (a) the Contract Price Per Tonne and the Royalty Price Per Tonne for that Royalty Period; (b) the amount of government royalties and excise paid or payable on LS Coal sold during that period together with all receipts or invoices relating to such payments; (c) the number of tonnes of LS Coal and BS Coal sold and delivered during that Royalty Period; and (d) the purchaser of all such LS Coal and BS Coal. 2.3 Manner of Payment The Royalty Payments shall be paid by Stocklyn to Elcom by Stocklyn's cheque or other manner reasonably directed by Elcom to Stocklyn from time to time.

"LS" is short for "Liddell Seam" and "BS" is short for "Barrett Seam". Clause 11 is in these terms: 11 Amendment This Deed may not be amended except by a further deed executed by the parties. 6 The Coal Supply Contract (or Contract 4180) was for a term of three years expiring on 5 November 1994. It required the appellant to supply to the first respondent (at that stage masquerading under the name "Electricity Commission") certain tonnages of coal at certain rates. The tonnages and the rates were both set out in a letter from the first respondent to the appellant dated 6 December 1991. The tonnages were one million tonnes in the first year 1991/1992, one million tonnes in the second year 1992/1993 and 800,000 tonnes in the third year 1993/1994. So, the combined effect of the Royalty Deed and the Supply Contract was that, the addition to whatever initial capital payments the respondents were entitled to, they would have an income stream consisting partly of royalty payments relating to sales by the appellant from coal procured from two nominated seams of coal and sold to outsiders and partly by the discount built in to the scheduled price of coal sold by the appellant to the respondents. 7 On 21 May 1993 the second respondent sold to the first respondent all its right title and interest under both contracts to the first respondent in consideration of a payment of $18.3 million. From the respondents' documents it is clear that they calculated the value of the income stream to which I have referred as $9.6 million. 8 After the execution of the contracts, both parties for some time proceeded to perform them. But it was not long before they both found that the deal they had consummated was not wholly satisfactory. From the respondents' point of view, it was found that too much coal was being purchased under the Supply Agreement, unnecessarily large stockpiles being built up; from the appellant's point of view, there were a multiplicity of perceived deficiencies; keeping coal from the Liddell Seam physically separate from Basset Seam coal and maintaining separate records for each was tiresome and costly, and it was desirable for the sake of the prospectus it was proposing to issue to extend the life of the supply contract. 9 Therefore, the parties commenced negotiations to vary the arrangements between them. Many were their meetings, and many their letters to each other. 10 On 6 January 1994 the appellant sent to the respondents a letter, the last portion of which was: 10. That the Royalty Deed be varied to equal $0.62 per tonne (as at June 1993) on all coal sold other than that under Contract 4180. This revision adds the Pikes Gully and other coal seams to the arrangement and avoids any confusion as to the blend of coals that may actually be sold (now that mining of the Liddell seam by underground method has ceased). Other variations to the Royalty Deed which will be required include: (i) the names of the parties to the Deed; (ii) the removal of any reference to Barrett seam royalty; (iii) any other changes necessary to reflect the intent of this letter. Furthermore we propose that the $0.62 per tonne royalty be increased in accordance with the current method for increases in Barrett seam Royalty as set out in Clause 2.4 of the Royalty Deed. We also propose that the Royalty remain in force until the equivalent value of this component of the original arrangement is paid to Pacific Power, or upon expiry of the original lease, whichever is the earlier . The calculation of this equivalent value shall be in accordance with the attached spreadsheet which has been developed and agreed between Cumnock and Pacific Power. We look forward to finalising documentation for these arrangements. 11 Further negotiations continued, partly on matters of substance, and partly on matters of form (eg what redrafting is needed, what forms of revocation are required, who will do what). However, matters came to a head with a letter from the appellant to the respondents on 2 February 1994, which bears the hallmarks of a contractual offer and the full text of which should be set out: Re: Variation of Coal Supply Contract No. 4180 This letter replaces our earlier letter dated 21st May, 1993. I wish to confirm matters discussed at meetings with you held on 17th March and 10th June 1993, and associated telephone conversations, with respect to the proposed variation to coal supply contract No. 4180. Pacific Power has indicated that there will be no invitation of tenders for supply of coal at the end of the current contract with Cumnock Coal, i.e. November 1994. The next opportunity for tendering for new coal supply is expected to be prior to expiry of contracts with some of Pacific Powers' mines in the Central coast conclude at end June 1996 (sic). Cumnock therefore proposes that the remaining deliveries under its contract be delivered over the period to end June 1996. In consideration of these arrangements which provide assistance to both Pacific Power and Cumnock, Cumnock requests the following modifications to the existing provisions of the Contract. 1. Cumnock seeks to deliver the outstanding tonnage under the Contract, as at 1st July 1993, over the three year period ending 30th June, 1996. 2. The average rate of supply of coal over the extended delivery period referenced in 1 above shall be 35,000 tonnes/month. However, fluctuations in the delivery schedule around this average will be influenced by Cumnock's export commitments. 3. Cumnock shall provide to Pacific Power by 1st June and 1st December each year, projections for: - Monthly deliveries for the next six month period commencing either 1st July or 1st January. - Deliveries on a six monthly basis for the remainder of the contract period. 4. The rate of supply of coal over the extended delivery period shall be a maximum of 60,000 tonnes per month. The actual tonnage to be delivered in any month shall be nominated by Cumnock and Cumnock shall provide Pacific Power with 30 days notice of the anticipated actual deliveries. 5. Pacific Power shall be under no obligation to accept daily tonnages above 4,000 tonnes per day. 6. The balance of the total tonnage of 2.8 million tonnes under the contract remains fully deliverable up until 30th June 1996. Pacific Power reserves the right to purchase coal from alternative sources to make up any shortfall below 2.8 million tonnes and Cumnock shall be liable for any additional cost incurred by Pacific Power in obtaining suitable make up coal. 7. Notwithstanding item (6) above, the outstanding tonnage to be delivered under contract as at 30th June 1995 shall not exceed 576,000 tonnes. Pacific Power reserves the right to purchase coal to make up for any shortfall necessary to ensure that a maximum of 576,000 tonnes remains deliverable as at 30th June 1995, and Cumnock shall be liable for any additional costs incurred by Pacific Power in obtaining suitable make up coal. 8. That the amount of security held by Pacific Power under Clause 8.4 of the Contract shall be varied for the period 1st July 1993 to the end of the Contract period to a sum equal to 2.16% of the remaining Contract value as at 1st July, 1993. The remaining Contract value shall be the product of the outstanding contract tonnage to be delivered as at 1st July 1993, multiplied by the adjusted contract Price for June 1993. i.e. the $26.84 discount price as at the Contract Base Date, escalated in accordance with the price fluctuation provisions of the contract, to the June 1993 price. 9. Replace the second and third paragraphs of Clause 7.16.5 with the following paragraphs: Where representative coal quality has been carried out in accordance with this contract on 75% or more of the delivered tonnage in a month, the quality on any days where quality analysis has not been carried out shall be set equal to the tonnage weighted average for the days of the month on which representative coal quality analysis was carried out. This method shall be used for the purpose of calculating the quality adjusted price on those days when quality has not been provided. Where representative quality analysis has been carried out in accordance with this contract on less that 75% of the delivered tonnage in a month, the quality on any days where representative coal quality analysis has not been carried out shall be set equal to the standard coal quality specified in Clause 3.1. 10. That the Royalty Deed be varied to equal $0.62 per tonne (as at June 1993) on all coal sold other than that under Contract 4180. This revision adds the Pikes Gully and other coal seams to the arrangement and avoids any confusion as to the blend of coals that may actually be sold (now that mining of the Liddell seam by underground method has ceased). Other variations to the Royalty Deed which will be required include: (i) the names of the parties to the Deed; (ii) the removal of any reference to Barrett seam Royalty; (iii) any other changes necessary to reflect the intent of this letter. Furthermore, we propose that the $0.62 per tonne royalty be increased in accordance with the current method for increases in Barrett seam royalty as set out in Clause 2.4 of the Royalty Deed. We also propose that the royalty remain in force until the equivalent value of this component of the original arrangement is paid to Pacific Power, or upon expiry of the original lease, whichever is the later. The calculation of this equivalent value shall be in accordance with the attached spreadsheet which has been developed and agreed between Cumnock and Pacific Power. We look forward to finalising documentation for these arrangements. 12 Several things should be noted about this letter: First, although in form a letter from the appellant (who signed it) to the respondents, it was in fact drafted by the respondent. Nonetheless, it must be treated in law as a letter of the appellants (except, perhaps, for the purposes of the contra preferentem rule, which in any event doesn't apply to this correspondence). Secondly, and more importantly, it deals both with the supply contract (paragraphs numbered 1 to 9) and with the Deed of Royalty (paragraph 10), which makes it highly unlikely that an apparent acceptance of its terms is effective for the former but not the latter. Thirdly, its proposed amendments to the Royalty Deed are obviously important, dealing with the minerals in respect of which royalties are payable, the amount of the royalties, the time during which the royalties are to be payable, and the acceptance of the idea that the amount of $9.6 million in total be paid (the amount on the "spreadsheet" referred to, and the amount to which I have already earlier referred). 13 Fourthly, and most significantly, whilst almost in the same terms as the letter of 6 January, the word "earlier" in the previous letter (which we know was favoured by the appellant) has been deleted and replaced by the word "later" (which was always the word favoured by the respondents). This, on the face of it, was a major concession by the appellant. 14 The respondents replied to that letter on 30 May 1994 with a letter in the following terms: Re: Contract No 4180 - Modifications to Contract Provisions I refer to your letter dated 2nd February, 1994, in which Cumnock proposed a number of changes to contract 4180. I am pleased to advise that Pacific Power accepts your proposal in principle for the modifications as referenced in your letter. With respect to Items 8 and 10 of your letter in particular: (i) Item 8 - Pacific Power calculates the varied security amount to be $743,000, based on 2.16% of the Contract value remaining as at 1st July, 1993, i.e. $27.53/t multiplied by 1,250,289 tonnes by 2.16%. I would request that you contact directly Mr S Baggaley of Pacific Power's Commercial Group on (02) 2687033 to arrange lodgement of an appropriate security for the revised amount, and subsequent return of the original security advice. (ii) Item 10 - Pacific Power proposes that as a first stage Pacific Power should redraft the Royalty Deed generally in accordance with Item 10, and provide Cumnock with a copy of that Draft for comment prior to its finalisation. The existing Deed will also need to be formally revoked by the relevant parties. Please direct any queries on the above to Mr N Lynch, Fuel Supplies Manager/Hunter. 15 After the letters of February and May 1994 the parties acted as if a final agreement had been concluded. For example, in the minutes of the parties' meeting of 8 June 1994 it was noted "Pacific Power advised the extension of contract time is now in place and drew Cumnock's attention to their commitment to possible projections for monthly deliveries for the six month periods beginning 1 July and 1 January along with deliveries on a 6 monthly basis for the remainder of the contract period". 16 Further, royalty payments were made in accordance with the February - May letters. The payment certificates detail the calculations of the royalties. Between October 1993 and May 1994 $0.62 was paid. On 2 June 1994, applying the quarterly indexation with the base price, the royalty was increased to $0.63 (rounded). That amount was paid between 2 June 1994 and January 1996. On 31 January 1996 the Royalty Payment Certificate once again noted the latest index and applied it to the Royalty payment, increasing it to $0.66. That was the amount paid until the appellant took it into its head to cease paying royalties in April 1998. 17 In retrospect, as her Honour (correctly, in my opinion) found, it is fairly clear that there was ever only one contentious issue, viz. whether the royalties were payable until the earlier of two dates - i.e. the date when the $9.6 million was recouped, and the date when the original lease expired - or the later of those two dates. That question had been solved by May 1994. Thereafter, nothing remained to do except document the parties' agreement - if (which I doubt) that could be considered "necessary" from any point of view. 18 The appellant argued that this was a case which fell into the third category of Masters v Cameron (1954) 91 CLR 353, where the parties make it clear that there is no binding relationship contemplated until there is the execution of a contract. Here, the parties acted, and obviously intended to act, as if they were bound by a contract, even although the formalisation of that contract (which they both anticipated) had not yet occurred. 19 It is not necessary to recite all the arguments submitted by the appellant in favour of the view for which it contended. One, however, which was said to be conclusive, ought be mentioned. That is clause 11 of the Deed of Royalty, which provides that any variation of the Deed must also be by Deed. However, as Handley JA pointed out in argument, parties can hardly be taken by a clause such as clause 11 to be depriving themselves of their own liberty to contract. 20 Similarly, the words "The royalty paid is pursuant to our revision of the agreement currently being finalised" regularly repeated on any Royalty Payment Certificate does not, in my view, mean much. It is some evidence that an agreement has not yet been finalised (by a document), it is no evidence that an agreement had not been reached. 21 Her Honour employed a description used by Knox CJ, Rich J & Dixon J in Sinclair, Scott & Company Limited v Naughton (1929) 43 CLR 310 at 317 of a contract "one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms".

as applicable to the present case. I quite agree. 22 I would dismiss the appeal with costs. 23 HANDLEY JA: I agree with Meagher JA. 24 FOSTER AJA: I agree with Meagher JA.

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