Esso Australia Resuorces Pty Ltd v Southern Pacific Petroleum NL

Supreme Court of Victoria|2004-11-23|Before: HOLLINGWORTH J

Contract - construction of contract - joint venture agreement - party's right to assign interest without consent of other party.

Contract - implied duty of co-operation - nature and extent of duty - whether party's exercise of contractual rights to assign interest without consent hinders or prevents other party from obtaining benefit of contract.

Contract - implied duty of good faith and fair dealing - nature and extent of duty -transaction structured for sole purpose of enabling assignment to occur without other party's consent - whether assignor acting in bad faith.

Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, applied.

Australian Broadcasting Commission v Australian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, applied.

Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410, applied.

Cathedral Place Pty Ltd v Hyatt of Australia Ltd and Ors [2003] VSC 385, considered.

Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33, considered.

Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1981-1982) 149 CLR 337, applied.

Commonwealth Bank of Australia v Spira [2002] NSWSC 905, considered.

Far Horizons Pty Ltd v McDonalds Australia Ltd [2000] VSC 310, considered.

Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903; (1999) ATPR 41-703, considered.

Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310, cited.

Mackay v Dick (1881) 6 App Cas 251, cited.

Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] UKHL 1; [2001] 2 WLR 170, considered.

Overlook v Foxtel [2002] NSWSC 17; (2002) Aust Contract Reports 90-143, considered.

Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 208 ALR 213, applied.

Peters (WA) Ltd v Petersville Limited [2001] HCA 45; (2001) 205 CLR 126, applied.

Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, applied.

Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289, cited.

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 14 CLR 596, applied.

Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52, applied.

United Dominions Corporation Limited v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1, cited.

Varangian Pty Ltd v OFM Capital [2003] VSC 444, considered.

The plaintiff ("Esso") and the first defendant ("SPP") are parties to the Rundle Joint Venture Agreement ("the JVA"). This case concerns the rights of SPP to assign its interest under the JVA to a proposed new special purpose vehicle, without the consent of Esso.

Esso argues that it must be consulted if SPP's interest is assigned to the new company and that it has a pre-emptive right to bid for the stake. Esso seeks an injunction to permanently restrain SPP and its administrators from giving effect to SPP's assignment proposal, which is contained in a draft deed of company arrangement. SPP seeks a declaration that the proposed assignment is permitted by the JVA.

The Rundle Joint Venture relates to an area near Gladstone, Queensland in respect of which the joint venturers hold certain mineral tenements. The object of the joint venture is to mine shale, carbonaceous material and other associated minerals and then process them to produce shale oil liquids, a product equivalent to naturally occurring crude oil. The Rundle deposit is estimated to have reserves of approximately 2 billion barrels of crude shale oil, naphtha and gas.

The JVA establishes an unincorporated joint venture between Esso, SPP and Central Pacific Minerals NL ("CPM"). Esso holds a 50% interest, and SPP and CPM each hold a 25% interest (respectively, "the SPP JV interest" and "the CPM JV interest"). SPP and CPM are treated as a single participant for the purposes of much of the JVA.

The parties first discussed the possibility of forming a joint venture to exploit the Rundle deposit in around 1979. At that time, SPP and CPM held the mineral rights and were looking for a partner. They called for submissions from interested parties. In February 1980, Esso submitted a bid containing three alternate proposals. Later that month, SPP and CPM announced the selection of one of Esso's proposals.

On 3 July 1980, the parties executed the initial heads of agreement. The initial joint venture agreement was executed on 18 December 1981.

In early 1985, the parties began to negotiate a revised joint venture agreement. The commercial aspects of these negotiations were finalised in late February and new heads of agreement were signed on 15 March 1985. Following further negotiations, the JVA was executed on 18 July 1985.

Active development of the Rundle deposit ceased in the latter part of the 1980s when, due to falling world oil prices, Esso withdrew from the shale oil industry in the USA and announced a deferral of the Rundle project. In the event that the Rundle project is started up again, it will require the investment of hundreds of millions of dollars under the JVA.

At the time of execution of the JVA in 1985, both SPP and CPM were listed public companies. In March 2002, the shareholdings in SPP and CPM were merged under court-approved schemes of arrangement. After the merger, there was a single listed public company, being SPP; CPM was its subsidiary. SPP has over 11,000 shareholders. SPP currently holds 90.4% of the issued capital in CPM, with the remaining shareholders of CPM having a right to elect to defer converting their CPM shares to SPP shares for up to 10 years.

In May 2003, both SPP and CPM granted fixed and floating charges in favour of Sandco Koala LLC. On 2 December 2003, the chargee appointed David Winterbottom and Angus Blackwood of Ernst & Young as joint receivers and managers of SPP, CPM and a number of subsidiary companies.

On 13 April 2004, the receivers and managers announced the completion of the sale of the majority of the business and assets of SPP and CPM to Queensland Energy Resources Ltd ("QERL"). Apparently there will be a substantial shortfall on the recovery of the secured debt. Any other assets or funds that SPP hereafter acquires may be taken by the receivers and managers to satisfy the charges.

The SPP and CPM JV interests were not secured by the charges and accordingly were not sold by the receivers and managers.

On 13 February 2004, the board of directors of SPP appointed Peter Geroff, Will Colwell and Andrew Love of Ferrier Hodgson ("the administrators") as administrators of SPP under the provisions of Part 5.3A of the Corporations Act 2001. On 5 March 2004, the administrators were appointed as administrators of CPM. The appointments were ratified at the first creditors' meeting of SPP on 20 February 2004 and of CPM on 12 March 2004.

The second meetings of creditors were convened to be held concurrently on 14 May 2004. On 6 May 2004, Mr Geroff issued a report on behalf of the administrators pursuant to s.439A(4)(a) of the Corporations Act 2001. In that report, the administrators noted that they had commenced inquiries to identify third parties who may be interested in acquiring the SPP and CPM JV interests, as well as the possible restructuring and recapitalisation of the companies. They noted that it would not be possible to finalise their inquiries prior to the creditors' meetings on 14 May 2004. Accordingly, they recommended that the meetings be adjourned for up to 60 days to enable inquiries to be finalised. The creditors accepted the recommendation and adjourned the meetings.

On 6 July 2004, Mr Geroff issued a further report to creditors. This report noted that the administrators had received a number of expressions of interest to acquire the SPP and CPM JV interests but had not yet received a formal offer.

On 6 August 2004, Mr Geroff wrote to Esso, outlining proposals that QERL had made with respect to acquiring the SPP and CPM JV interests. QERL had offered to purchase the SPP JV interest, subject to a number of conditions, and to purchase the shares held by SPP in CPM ("the QERL offer"). One of the conditions of the QERL offer was that Esso not exercise its pre-emptive rights under the JVA. Mr Geroff asked Esso whether it would consent to a sale to QERL on the terms outlined in his letter, including whether Esso agreed to waive its pre-emptive rights.

Esso responded by letter dated 9 August 2004, indicating that it would require some time to analyse the QERL offer and would not be in a position to provide consent or otherwise prior to the suggested date of 16 August 2004. Esso also said that it understood that the 6 August letter had triggered a 90 day period for exercising its pre-emptive rights under clause 24.06 of the JVA.

Ten days later, Esso informed the administrators that it was now of the opinion that Mr Geroff's letter of 6 August did not operate as a trigger for the purposes of the JVA. It also said that, for the avoidance of doubt, Esso's present position was that it was not prepared to waive its rights as set out in clause 24, or any other provision, of the JVA.

The administrators circulated a further report to creditors, dated 17 August 2004. That report provided further details of the QERL offer and described a separate, associated offer from Ascent Capital Pty Ltd to recapitalise SPP. The 17 August report also referred to an offer for the SPP and CPM JV interests from John Allen Browning, as agent for SPV, a public company yet to be incorporated ("the Browning offer'). The report noted that Browning claimed that the structure of this proposal meant that, should it be accepted by the creditors, Esso's consent to the Browning offer was not required, as SPV would be a "related corporation" of SPP and CPM within the meaning of the JVA.

After considering the 17 August report, Esso informed the administrators that its preliminary view was that the Browning offer was outside the terms of the JVA and Esso did not consent to it.

On 24 August 2004, a further concurrent creditors' meeting of the two companies occurred in Brisbane. The commencement of the meeting was delayed for approximately half an hour due to the tabling of an amended Browning offer and an amended QERL offer. The amended Browning offer was now split into two offers - one to SPP and a separate one to CPM. Neither was dependent on the other, so that either of the companies could assign its interest in the joint venture to SPV. SPV would also have the right to dispose of the Rundle assets at any time as part of the amended offer. The QERL offer was amended so as to remove as a pre-condition the obtaining of Esso's consent to the purchase of SPP's shares in CPM.

At the 24 August meetings, a majority of creditors of SPP in number and value approved a deed of company arrangement based on the amended Browning offer ("the draft DOCA"). A majority of creditors of CPM approved a deed of company arrangement based on the amended QERL offer, in so far as it related to CPM.

Because QERL will be acquiring 100% of the shares in CPM, there will be no assignment under clause 24 of the JVA and the acquisition will therefore not trigger Esso's pre-emptive rights. The deed for CPM was executed on 14 September 2004.

The draft DOCA requires SPP to transfer the SPP JV interest to SPV, in exchange for SPV paying $175,000 into a trust fund for the benefit of the administrators and unsecured creditors. The proposed assignment deed is attached to the draft DOCA.

The draft DOCA provides for three categories of unsecured creditors: small creditors, Pool A creditors and Pool B creditors. In exchange for extinguishment of their debts, the small creditors receive a share of the payment by SPV to the trust fund, and the Pool A and Pool B creditors must elect between receiving equity in SPV or a share (if any) of the funds paid by SPV to the trust fund.

The draft DOCA provides for the participating Pool B creditors to lend approximately $250,000 to SPV to establish a working capital facility. In that way, it is said that an insolvent joint venture participant, SPP, will be replaced by a solvent one, SPV.

SPV will assume SPP's obligations under the JVA. SPP will guarantee the performance of SPV under the JVA.

SPV reserves the right to dispose of the Rundle assets at any time, subject to the provisions of the JVA.

SPP agrees to cause the appointment of three named persons as the directors of SPV. The agent consents to their appointment. SPP will do all things necessary to ensure that SPV is a subsidiary of SPP at all relevant times.

SPP will be placed into liquidation after the assignment to SPV, to enable the creditors to claim a write-off for tax purposes.

Esso alleges that this proposal will be in breach of:

(a) Clause 24 of the JVA, by transferring the interest nominally, but not in substance, to a "related corporation";

(b) Clause 27 of the JVA, which requires participants to use their best endeavours to avoid conflict with the best interests of other participants;

(c) An implied term of the JVA that each participant do all such things as are necessary on its part to enable the other to have the benefit of the JVA;

(d) An implied term of the JVA to exercise SPP's rights in good faith.

It is not this Court's task to assess the draft DOCA or to determine whether it is in the best interests of creditors. My task is to consider whether the proposals in the draft DOCA are permitted by the JVA.

The draft DOCA must be executed by SPP within 21 days after the meeting of creditors or within the time allowed by a court following an application made within those 21 days.[1] The Federal Court has extended the time for executing the DOCA pending the resolution of the issues in this proceeding.[2] The Federal Court proceeding has been adjourned for further mention on 26 November 2004.

On 13 September 2004, Esso applied to this Court on an ex parte basis seeking interlocutory injunctive relief. Smith J granted a temporary injunction until 20 September 2004, restraining SPP and the administrators from dealing with the SPP JV interest "except pursuant to Article 24.01(b)" of the JVA, that is to say, except with the consent of Esso.

This proceeding was commenced on 14 September 2004, and the injunction application was made returnable before Dodds-Streeton J on 17 September 2004. Her Honour extended the interlocutory injunction until trial or further order. Her Honour also made an order giving the directors of SPP power to defend the proceeding on behalf of SPP, pursuant to s.447A of the Corporations Act 2001. The administrators are the second to fourth defendants but have taken no active part in this proceeding. They have indicated that they will abide by any orders of the court.

On 22 September 2004, Smith J refused an application by SPP for an order transferring this proceeding to the Federal Court in New South Wales.

On 15 October 2004, Dodds-Streeton J made various orders for interlocutory steps leading up to an expedited trial date.

Clause 24[3] of the JVA deals with the rights of the parties to assign their interests in the JVA.

"(a) Each Participant shall have the right to assign all or part of its Interest to a Related Corporation without the consent of the other Participant, subject only to the Related Corporation's assumption of the assignor's obligations under the various agreements relating to the Joint Venture and the assignor guaranteeing the performance of the Related Corporation. Such guarantee will not cease merely because the assignee ceases to be a Related Corporation. (b) Subject to this article each Participant may with the prior written consent of the other, which shall not be unreasonably withheld, assign all or part of its Interest to a third party ('Relevant Interest'). (c) On assignment of a Relevant Interest, this agreement shall be modified so that the rights and obligations of the assignor are shared with the assignee in proportion to the Interest assigned."

"Related Corporation" is defined in clause 1.01 of the JVA as having "the same meaning as ascribed to that term by section 5(1) of the Companies Act 1981. Without limiting the generality of the foregoing a corporation shall be deemed to be a Related Corporation of SPP/CPM if it is a Related Corporation of either SPP or CPM".

Clause 24.04 permits a participant to use its interest under the JVA as security for financing, with the prior written consent of the other participant.

"(a) It shall not be unreasonable to withhold consent to any proposed assignment of a Relevant Interest by a Participant if: (i) such assignment would result in there being more than 4 Participants in the Joint Venture (SPP together with CPM constituting one Participant); (ii) the assignee is not substantial and not capable of meeting the obligations of a Participant; (iii) any Participant can demonstrate within 60 days after receiving notice of a proposed assignee that such assignment would or is likely to result in a breach of the Trade Practices Act 1974 of the Commonwealth of Australia or the antitrust laws of the United States; or (iv) the proposed assignment would require [Esso] to divest itself of any of the Interest held by it to comply with the foreign investment guidelines of the Commonwealth Government. (b) If a chargee wishes to sell the whole or part of a Participant's Interest, pursuant to clause 24.04(b)(ii) consent may be withheld only in the circumstances outlined in subparagraphs (a)(i) to (iv)."

Clause 24.02 of the JVA provides that where a participant wishes to dispose of a relevant interest, or a chargee wishes to sell the whole or part of a participant's interest, it shall be entitled, at its election, either to auction the relevant interest pursuant to clause 24.05 or to sell it pursuant to clause 24.06.

Clause 24.05 sets out the requirements for a sale by auction, where a participant elects to auction a relevant interest. The other participant is entitled to bid at such an auction.

Clause 24.06 sets out the provisions which govern sale by private treaty where a participant elects to dispose of a relevant interest by way of sale other than by auction. It must first give the other participant notice of the minimum price at which it is prepared to sell the relevant interest. The other participant has the right to purchase within 90 days of notice, for the minimum price.

Clause 24.07 requires an intending assignor to give not less than 30 days notice of a proposed assignee.

Clause 24.10 provides that every assignment pursuant to clause 24 shall be made expressly subject to the JVA and upon the express condition that the assignee assumes all obligations, liabilities and duties of the assignor under the JVA.

Section 5(1) of the now repealed Companies Act 1981 (Cth) includes the following:

" 'related corporation', in relation to a corporation, means a corporation that is deemed to be related to the first-mentioned corporation by virtue of sub-section 7(5)."

"Where a corporation - (a) is the holding company of another corporation; (b) is a subsidiary of another corporation; or (c) is a subsidiary of the holding company of another corporation, that first-mentioned corporation and that other corporation shall, for the purposes of this Act, be deemed to be related to each other."

Here, it is proposed that SPV will be a subsidiary of SPP through SPP's having the power to appoint directors, with the consent of Mr Browning. SPP will not be a shareholder in SPV.

Sub-section 7(1)(a)(i) provides that, for the purposes of the Act, a corporation shall be deemed to be a subsidiary of another corporation if that other corporation controls the composition of the board of directors of the first-mentioned corporation. This is the sub-section which is relied upon by SPP.

Sub-section 7(2) relevantly provides that the composition of a corporation's board of directors shall be taken to be controlled by another corporation inter alia if that other corporation can appoint or remove all or a majority of directors, whether with or without the concurrence or consent of any other person.

The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That normally requires consideration not only of the text, but also the surrounding circumstances known to the parties, and the purpose and the object of the transaction.

Esso sought to tender draft contracts and other documents and affidavit material relating to the negotiations which preceded the JVA or earlier agreements between the parties. In my opinion, this material went only to the subjective intentions or understandings of the parties and did not satisfy the objectivity requirements laid down by the High Court in cases such as Codelfa Construction Pty Ltd v State Rail Authority of NSW[4], Pacific Carriers Ltd v BNP Paribas[5] and Toll (FGCT) Pty Limited v Alphapharm Pty Limited.[6] I ruled in the course of the trial that this material contravened the parol evidence rule and was inadmissible.

It is well-established that in giving meaning to the words of a commercial agreement courts should give the words the natural meaning which they bear. However, if there is any ambiguity, the court should endeavour to avoid a construction which makes commercial nonsense or is shown to be commercially inconvenient.

Stephen J described the rule in Australian Broadcasting Commission v Australian Performing Right Association Ltd[7]:

"This agreement is one in which, in my view, two corporations have determined, in unambiguous terms and in a formal document obviously prepared with legal assistance, their quite complex contractual relationship for a considerable term of years into the future. The approach of courts to the construction of such documents, when they contain no ambiguity nor any other patent error or omission, cannot be other than that of an uncritical rendering of the meaning of the text."

"If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even if the construction adopted is not the most obvious or the most grammatically accurate' to use the words from earlier authority... the court should construe commercial contracts `fairly and broadly, without being too astute or subtle in finding defects'."[8]

In the present case, in my opinion there is no relevant ambiguity in the provisions under consideration. They simply produce a result which Esso finds commercially unacceptable.

Clause 24.01(a) contains certain requirements for an assignment to occur without consent:

(a) It must be to a "related corporation" within the meaning chosen by the parties;

(b) The assignee must assume the assignor's obligations under the JVA and related contracts;

(d) The assignor's guarantee must be a continuing one.

In construing clause 24, I bear in mind that the JVA is a commercial agreement entered into by substantial companies, who were capable of looking after their own commercial interests and ensuring that the JVA reflected their final agreement. The JVA is the latest in a series of contracts between the parties and was entered into after lengthy negotiations and, presumably, the obtaining of legal advice.

There are a number of strands to Esso's construction argument, which are considered below.

Esso says that the general structure of clause 24 is that assignments require the consent of the other participant, and that an assignment to a related corporation without consent is an exception to this general rule.

On the other hand, SPP says that there are two separate and wholly independent assignment regimes provided for in clause 24. First, clause 24.01(a) provides for assignment without the necessity of the other participant's consent. Secondly, clause 24.01(b) and the remainder of clause 24 provide for assignment requiring the consent of the other participant.

I agree with SPP's submission as to the general structure of the clause. Clause 24.01(a) is not in its terms expressed to be subject, or an exception, to clause 24.01(b). Nor is it obvious, when one looks at the nature of the rights and obligations granted by the sub-clauses, that one must be an exception to the other. They are two distinct provisions covering discrete situations: assignment to related corporations without consent and assignment to anybody else with consent.

It is true that most of the sub-clauses in clause 24 are concerned with assignments with consent, and govern matters such as when consent may be withheld or the procedures by which interests may be sold. It is hardly surprising that these matters require some detailed elucidation. The fact that there are more provisions dealing with consensual assignments does not mean that one should read down the ordinary and natural meaning of clause 24.01(a), so as to read it as an exception to a general rule that assignments require consent.

In construing the expression "related corporation" in clause 24.01(a), Esso accepts that sub-sections 5(1) and 7(5) of the Companies Act 1981 apply. However, it does not accept that the extended statutory definition of "subsidiary" in sub-sections 7(1) and (2) of that Act applies.

Esso concedes that, if the extended statutory definition applies, SPV will be a related corporation of SPP. This is because, at the time of the proposed assignment, SPP will control the composition of SPV's board.[9]

Esso points to the fact that s.7(5) deems certain corporations to be related corporations "for the purposes of this Act." It says that the extended definitions of "subsidiary" elsewhere in s.7 operate for the purposes of the Act, but not for the purposes of the JVA. It argues that "subsidiary" in s.7(5) should be given its "natural meaning", so that there would have to be some substantial degree of ownership for a company to be a subsidiary, rather than its extended meaning.

There is no justification for such a construction. In drafting the JVA, the parties chose to incorporate a statutory definition of "related corporation." Section 7(5) is a deeming provision and must necessarily include previous sub-sections in which the concept of "subsidiary" is defined. Had the parties wanted to adopt some other definition of "subsidiary", such as a "natural meaning" (whatever that might mean), they could have done so.

Esso argues that clause 24 confers important and valuable rights upon the non-assigning participant. The right to determine with whom it will be in a contractual relationship is said to be "a fundamental necessity" in a long term joint venture agreement such as this one. It is said that the JVA must be construed in a way that protects such rights.

However, any such rights must be considered in the context of the JVA as a whole.

Clause 24 confers important and valuable rights on the assigning participant as well as the non-assigning participant. As long as the assignor provides an ongoing guarantee and the assignee assumes the assignor's obligations under the JVA, it is entitled to assign without consent to a related corporation.

The JVA also allows for change of ownership of any participant. There is no provision to the effect that a change of ownership will constitute an event of default or entitle one party to acquire the other's interest. In the present case, QERL will be acquiring all the shares in CPM under its deed of company arrangement and will effectively become Esso's new joint venture partner. It will do so without Esso having any say in the matter. There is no suggestion that such an acquisition is not permitted under the JVA.

Similarly, if SPV became SPP's parent company (instead of becoming its subsidiary and taking an assignment of the CPP JV interest), it could effectively become Esso's new joint venture partner, without Esso having any say in the matter.

Alternatively, SPP could assign the SPP JV interest to a wholly-owned subsidiary (in the traditional sense) and then sell the subsidiary to a third party, without the consent of Esso.[10] That would produce a result not dissimilar to the proposed result in this case.

For these reasons, it cannot be said that the JVA provides an absolute right to an existing participant to determine the identity of all future participants in the JVA, or that clause 24 should be construed to give effect to such a right.

It is reasonable to assume that, at the time of drafting the JVA, both sides had in contemplation the possibility that one or both sides might at some stage in the future undergo changes in corporate structure or group needs. It would presumably have been in the interests of both parties to provide some degree of flexibility in this. In the case of change of participant by assignment to a related corporation, the requirement that the assignor provide an ongoing guarantee was presumably intended to put some sort of practical restriction on assignments without consent to entities unconnected in any commercial sense with the assignor.

As SPP will be wound up once the assignment has occurred, SPV will, at some point in the future, no longer be a related corporation of SPP.

Esso's construction argument seeks to infer into clause 24 a requirement that, as at the time of assignment, SPP must intend that its related corporation remain a related corporation. It is said that to allow an assignment to SPV in the present circumstances is to defeat the intention of clause 24.

I agree with SPP that this argument is inconsistent with the clear terms of clause 24.01(a), the last sentence of which clearly contemplates that a corporation which is related at the time of transfer may cease to be a related corporation:

"Such guarantee will not cease merely because the assignee ceases to be a Related Corporation."

Clause 24 imposes no requirement that an assignee corporation must remain related to the assignor for a specified minimum period of time.

The last sentence in clause 24.01(a) was inserted into the final JVA, but did not exist in earlier heads of agreement or the initial JVA. It must be assumed that the parties turned their minds to the question of change of corporate structure when this sentence was inserted, and agreed that there was no need for an assignor to remain related to an assignee after an assignment had occurred. The assignor simply had to continue to guarantee the assignee's obligations.

Of course, one consequence of SPP going into liquidation will be that any guarantee given by it will be worthless.[11] However, even if it did not go into liquidation, its current financial position is such that its guarantee would be worthless.[12]

Esso expressly conceded that the remaining participant must be taken to have accepted the commercial risk that an assignor's guarantee is only as good as the financial position of the assignor.

This is consistent with the general structure of the JVA, in which each participant accepts the commercial risk that it may end up in a joint venture with a company that is unable to fund substantial works. For example, the insolvency or administration of one participant is not an event of default under the JVA, such as might entitle the other to terminate the JVA or exercise some right to acquire the other's interest. As is discussed later in these reasons, if a participant is unable to fund its participation, that affects its entitlement to off-take from the project and its voting rights.

Purpose of creating a subsidiary relationship

It is common ground that SPV has been structured as a subsidiary of SPP for the sole purpose of attracting the operation of clause 24.01(a) and thus to avoid the requirement which would otherwise arise for Esso's consent and for its pre-emptive right to be observed.

This particular structure has apparently been driven by the fact that SPP is both in receivership and under administration. Were that not the case, the same result could be achieved, without any possible objection from Esso, by adopting the route to which I referred in paragraph 76.

Esso repeatedly referred to this in pejorative language as being a "contrivance", an "artifice", a "device" or a "loophole". Such descriptions rather beg the question as to whether the proposed assignment is permitted under the JVA.

On the other hand, SPP argued that the purpose of the structuring is irrelevant. It says that it is either entitled to use clause 24.01(a) in this manner or it is not. As a matter of construction, I agree with SPP.

Even if the proposed assignment might be permitted as a matter of strict construction of clause 24, Esso says that SPP's proposed assignment should be characterised as follows:

(a) It has been proposed not by SPP but by Mr Browning in the interests of the larger creditors of SPP;

(b) It involves the establishment of a new company to purchase an assignment of SPP's interest which is to be "technically" a subsidiary of SPP;

(c) The technical status of being a subsidiary is to be achieved by giving SPP some limited and possibly temporary "control" over the composition of the board of SPV;

(d) This is done, so it is said, to "comply" with the JVA. In fact it is done to prevent the operation of the consent and preferential right of purchase provisions of the JVA.

Esso concedes that each of the offending features may not be objectionable in itself, but says that their combined effect is such as to constitute a "contrivance". Even if, on its proper construction, clause 24.01(a) would permit the proposed assignment, Esso says that the offending features mean that the assignment would contravene certain implied terms or the express terms of clause 27.

It is useful at this point to consider the general nature of the JVA and the parties' obligations under it.

The JVA is a long term agreement for the development and exploitation of a major mineral resource. Whilst presently suspended for economic reasons, when it proceeds it will involve its participants in the expenditure of hundreds of millions of dollars in carrying out its objectives. Esso is the project operator. There is a project operating committee which contains representatives from all participants. JVA participants have a right but not an obligation to participate in the development of the project. In very simplified terms, if a participant does not contribute financially, its off-take from the project is reduced to nothing and it does not have a casting vote on the operating committee.

Esso says that the JVA is quintessentially a contract of a type which requires good faith in performance and fidelity to the bargain, as well as trust and confidence of the kind necessary in any partnership or like relationship. It is perhaps trite to observe, but joint venture agreements can vary enormously and do not all give rise to the same relationships, as the High Court noted in United Dominions Corporation Limited v Brian Pty Ltd[13], in the context of fiduciary obligations.[14]

I turn to consider the specific alternative arguments.

Esso claims that the proposed assignment will be in breach of clause 27 of the JVA, which is in the following terms:

Subject to this agreement each Participant shall at all times during the currency of this agreement use its best endeavours to ensure that no action is taken by itself, its servants, agents or contactors which could or might result in or give rise to the existence of conditions prejudicial to or in conflict with the best interests of the other Participant in respect of this Joint Venture. In particular, but without limiting the generality of the foregoing, a Participant shall take or cause to be taken all necessary and proper precautions to prevent its servants, agents and subcontractors from receiving from or making, providing or offering to any person who could or might be in a position to influence the decisions hereunder of the other Participant with respect to the Project any substantial gift, entertainment, payment, loan or other consideration. Nothing in this article shall preclude either Participant from carrying on its normal course of business outside the Area."

The particular prohibition in clause 27 is directed at secret commissions, bribes and the like. It is not entirely clear to what actions, other than those, this clause is directed. SPP argues that the heading indicates that the clause is concerned only with conflict of interest situations within the confines of the ongoing operations of the joint venture, of which this is not one.[15]

It is not necessary for me to determine the precise scope of clause 27. The obligations imposed by clause 27 are in their terms "subject to this agreement." If clause 24 specifically permits the proposed assignment, then it will not be in breach of the more general provision in clause 27.

In the further alternative, Esso says that there is an implied term of the JVA that each participant will do all such things as are necessary on its part to ensure that the other will have the benefit of the JVA. The term is said to be implied by law.

Esso relies on High Court decisions such as Peters (WA) Ltd v Petersville Limited[16] and Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd[17] as authority for the general proposition that the law implies an obligation on one contractual party to do all such things as are necessary to enable the other party to have the benefit of the contract.

SPP argues that, in the Secured Income case, the High Court proceeded on the basis of a passage in Mackay v Dick[18] in the following terms:

"... where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect."

SPP says that clause 24.01(a) does not refer to something "which cannot effectively be done unless both parties concur in doing it," and therefore no implied term arises.

However, the court in Secured Income went on to say that the implied term is not limited to acts which require both parties to concur.

"It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performances by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself."[19]

Even if the existence of such an implied term is not problematic, its scope and application to the particular facts may be. Neither counsel was able to refer me to any case in which such a duty was implied in circumstances analogous to these.

It is not entirely clear just how it is said that such an implied term would apply in the present case. It seems to be said that there is an implied term that Esso will have the benefit of the operation of clause 24 apart from clause 24.01(a), and SPP shall not hinder or prevent the fulfilment of the purposes of the express promises made elsewhere in clause 24. It is said that the proposed assignment will hinder or prevent that occurring.

How can it be said that SPP is under a duty not to exercise a contractual right to assign without consent, so that Esso can have the benefit of different provisions which govern assignments with consent?

Esso says that it is now established, at least at intermediate appellate level, that there is a further term implied by law in commercial contracts requiring the exercise of good faith in the performance of the contract.

Such a term prevents reliance on strict rights if, in the context of the contract as a whole, this would subvert the character of the contract. In particular, Esso relies upon the comment by Barrett J in Overlook v Foxtel[20] that:

"The implied obligation of good faith underwrites the spirit of the contract and supports the integrity of its character. A party is precluded from cynical resort to the black letter."[21]

Here, it is said that SPP is making cynical resort to the black letter of clause 24.01(a). The transaction has been structured in this way for the sole purpose of enabling a transfer to be made without consent. Esso says that it is therefore appropriate and proper to characterise that as an evasion of the spirit of the bargain, because clause 24.01(a) could not be seen on any view as having been intended to operate in such a way. It says that SPP is precluded by a duty of good faith implied in the JVA from exercising its contractual rights under clause 24.01(a) in the current circumstances.

This raises two questions. First, should a term of good faith be implied in the JVA? Secondly, if so, is SPP's proposal in breach of that implied term?

Should a duty of good faith be implied into the JVA?

Such a term could not be implied by custom or usage, nor would "business efficacy" or the "officious bystander" require its implication in fact.[22] Counsel for Esso therefore correctly focussed on whether such a term should be implied in law.

Terms implied by law are generic. They can arise from the nature, type or class of contract in question.[23] Terms can be implied into contracts of particular class by statute,[24] because they have become part of the common understanding,[25] or because they are necessary to prevent the contract being undermined.[26]

The High Court has not as yet expressly endorsed the implication of a term of good faith into a commercial contract. In Royal Botanic Gardens and Domain Trust v South Sydney City Council[27] the High Court recognised the debate in various Australian authorities concerning the existence and content of an implied obligation or duty of good faith and fair dealing in contractual performance and the exercise of contractual rights and powers. They noted that the parties before them had accepted that such an obligation applied to the exercise of the lessor's powers under the relevant rent review clause. Accordingly:

"The result is that, whilst the issues respecting the existence and scope of a `good faith' doctrine are important, this is an inappropriate occasion to consider them".[28]

Kirby J also noted that it was unnecessary to decide whether Burger King Corp v Hungry Jacks Pty Ltd[29] and like authorities stood for the principle that:

"both in performing obligations and exercising rights under a contract, all parties owe to one another a duty of good faith: and the extent to which, if such were to be the law, a duty of good faith might deny a party an opportunistic or commercial exercise of an otherwise lawful commercial right".[30]

As the New South Wales Court of Appeal in Burger King recognised, for a term to be implied at law in a new category of case, it must be reasonable and necessary. Quoting from McHugh and Gummow JJ in Byrne v Australian Airlines Ltd, the Court noted that:

"Many of the terms now said to be implied by law in various categories of case reflect the concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined..."[31]

The decisions in which lower courts have recognised the legitimacy of implication of a term of good faith vary in their suggested rationales[32]. In Burger King Rolfe J at first instance held, inter alia, that there was an implied duty on a franchisor to act in good faith in the exercise of contractual powers of termination of the franchise agreement[33].

On appeal, the Court of Appeal endorsed Sheller JA's acceptance in Alcatel Australia Ltd v Scarcella[34] that an obligation of good faith in the performance of obligations and the exercise of rights could be implied into commercial contracts.

"A review of cases since Alcatel indicates that courts in various Australian jurisdictions have, for the most part, proceeded upon an assumption that there may be implied, as a legal incident of a commercial contract, terms of good faith and reasonableness."[35]

The defendants in that case also contended that, to the extent to which an obligation of good faith may properly be implied into a commercial contract, it cannot operate to prevent a party from promoting its legitimate interests, or to block the express terms of the contract. The Court of Appeal stressed that the duty of good faith did not amount to a fiduciary duty and did not preclude a party from having regard to its legitimate interests.

Notions of `fairness' and `reasonableness' are a common starting point when defining good faith. In Renard Constructions (ME) Pty Ltd v Minister for Public Works,[36] Priestley JA commented that reasonableness has `much in common' with a duty of good faith.[37] Subsequent cases, such as Burger King and Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd[38], have held that the duty to act fairly and in good faith will ordinarily be satisfied if a contractual power is exercised reasonably.[39] Reasonableness in the contracting process is therefore a common expectation of good faith behaviour.

In Garry Rogers, Finkelstein J also recognised that where such a term may properly be implied it would not prohibit actions designed to promote the party's legitimate interests, although it would require a party not to act capriciously.[40]

In Far Horizons Pty Ltd v McDonalds Australia Ltd[41], a case which also involved a franchise agreement, Byrne J observed that:

"I do not see myself at liberty to depart from the considerable body of authority in the country which has followed the decision of the New South Wales Court of Appeal in Renard Constructions (ME) Pty Ltd v Minister for Public Works. I proceed, therefore, on the basis that there is to be implied in a franchise agreement a term of good faith and fair dealing which obliges each party to exercise the powers conferred upon it by the agreement in good faith or reasonably, and not capriciously or for some extraneous purpose. Such a term is a legal incident of a contract."[42]

It has also been recognised that such an implied term would have to be consistent with the express terms of the agreement. In Burger King the Court of Appeal accepted that:

"an implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation which would be inconsistent with other terms of the contractual relationship."[43]

The Western Australian Court of Appeal in Central Exchange Ltd v Anaconda Nickel Ltd[44] also accepted that the principles of good faith could not block the use of terms that actually appear in the contract.

In assessing the standard of conduct required by a duty of good faith, courts have made reference to the `legitimate interests' of the parties, or have suggested that good faith should prohibit a party from exercising a contractual power `capriciously' or "for an extraneous purpose".[45] The judgment of Sheller JA in Alcatel identifies the correlation between the two concepts:

"If a contract confers power on a contracting party in terms wider than necessary for the protection of the legitimate interests of that party, the courts may interpret the power as not extending to the action proposed by the party in whom the power is vested or, alternatively, conclude that the powers are being exercised in a capricious or arbitrary manner for an extraneous purpose, which is another way of saying the same thing." [46]

This approach entitles a party to engage in conduct which protects its own legitimate interests, but also requires consideration of the interests of the other party to the contract. By curtailing a party's right to act self-interestedly in this way, good faith imposes a narrower and less onerous standard than that required of fiduciaries.

The obvious question in this context is what amounts to a "legitimate interest". This inquiry arises when a party has allegedly acted either in a way which is beyond what is necessary to achieve its legitimate interests, or in a fashion which fails to take into account the legitimate interests of the other party. In the Garry Rogers and Overlook decisions, the courts adopted a broad construction of what is considered to be a "legitimate interest".

In Garry Rogers, the supplier of Subaru cars issued a notice of termination to one of its car dealers, because the dealer initially refused to comply with a "Six Star Revitalisation Program". In his decision, Finkelstein J held that the supplier's conduct was not in breach of an implied duty to act in good faith.[47] Terminating the contract was in the supplier's own business interests, as the dealer's original refusal indicated that he was not willing to act in the best interests of the dealership group as a whole.[48]

In the Overlook case, Overlook provided Foxtel with Greek and Italian language channels, in return for a percentage of the subscription price to those channels. Foxtel later reduced the price of the add-on channels in an endeavour to improve subscriber numbers and to lure Greek and Italian customers from Optus. Overlook alleged that this was in breach of the implied obligation to act in good faith in the performance of the contract. In rejecting Overlook's claim, Barrett J held that Foxtel's reduction in price was a legitimate business judgment in the interests of both parties. Foxtel's decision recognised that there would be a fall in revenue for both parties, but was made in the expectation that increased market penetration would eventually reap suitable rewards.[49]

The decisions in both Garry Rogers and Overlook illustrate that the concept of "legitimate interests" does not have to refer to a party's immediate commercial interest, but can be used to validate behaviour in the longer-term interest of one, or both, of the parties.

Nettle J concluded in Cathedral Place Pty Ltd v Hyatt of Australia Ltd & Ors:[50]

"Even allowing for the existence of an implied obligation of good faith and fair dealing, about which I suppose there can no longer be too much doubt, there is no lack of good faith or fair dealing in a party to a contract acting to promote its own interests consistently with the basis on which it entered into the contract."

Dodds-Streeton J in Varangian Pty Limited v OFM Capital[51] also said that the authorities indicate that if a term of good faith and reasonableness prohibiting the exercise of powers capriciously or for extraneous purposes is be implied into a contract such as the JVA, it could not operate to restrict actions designed to promote the legitimate interest of SPP.

Good faith can also be regarded, conceptually, as an obligation to refrain from acting in "bad faith". This "excluder" approach was first articulated by Professor Summers, who identifies "bad faith" conduct as encompassing: evasion of the spirit of the deal, wilful rendering of only substantial performance, abuse of a power to determine compliance, interference, and failure to cooperate in the other party's performance.[52] The excluder approach has received some Australian judicial support in Renard Constructions[53] and Overlook,[54] and was recently acknowledged in England by Lord Scott in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd:

"Unless the assured has acted in bad faith, he cannot, in my opinion, be in breach of a duty of good faith, utmost or otherwise." [55]

By enabling judges to compare the conduct in question with a check-list of "bad faith" behaviour, excluder analysis is said to help them to form views about whether a breach of good faith has occurred. However, whether it does anything to extend the definition of good faith beyond questions of reasonableness, legitimate interests and extraneous purposes is highly debatable.

As mentioned earlier, Esso relies heavily on the comments of Barrett J in the Overlook case, that the duty may be implied to prevent cynical resort to the black letter of the contract. These comments have not been widely picked up, and reflect the "high water mark" for Esso's argument. Barrett J's comments were explained by Gzell J in Commonwealth Bank of Australia v Spira[56] in the following terms:

"A party is precluded from cynical resort to the black letter but is not fixed with a duty to subordinate self-interest entirely. The duty is not one to prefer the interests of the other contracting party. Rather it is a duty to recognise and to have due regard to the legitimate interests of both parties in the enjoyment of the fruits of the contract delineated in its terms"[57].

In Spira, Gzell J considered that the duty of good faith applied to a facility agreement between a bank and a commercial borrower, but found that the term of good faith had not been breached, in circumstances which included variations to the agreement and the provision of further funding in which the lender was entitled to consider its legitimate commercial interests, even if they were inimical to those of the borrower.[58]

What is the content of such a duty in this case?

Assuming that some general duty of good faith can be implied into the JVA, the real question is what its exact content might be in the present case.

Esso argues that the provisions of clause 24 as a whole confer rights on the non-assigning participant, in this case Esso, which it is legitimately entitled to perform without evasion. The scope and extent of those rights must be assessed before and in the absence of any conduct that defeats or undermines them. By using clause 24.01(a) to "evade" the requirement for Esso's consent and its pre-emptive purchase right, it is said that SPP is defeating or seriously undermining Esso's rights or legitimate expectations to due performance of the remainder of clause 24. The intended "evasion" of clause 24 is said to be an act of bad faith in the performance of the contract and thus a breach of the implied duty of good faith.

Although the offending features are said to demonstrate a lack of good faith, Esso concedes that none of them would constitute bad faith in themselves. Nor is it suggested that the giving of a guarantee by an insolvent assignor would be an act of bad faith; as has previously been mentioned, it is accepted that the insolvency of a participant/assignor was one of the commercial risks agreed by the parties.

SPP says that even if such a term could be implied into the JVA generally, it could not operate to restrict actions designed to effect the legitimate interest of SPP to assign its interest in the JVA in compliance with article 24.01(a).

SPP concedes that there may well be clauses in the JVA in respect of which one or both parties has to exercise its rights under an implied duty of good faith. The entitlement of a participant to withhold consent to a requested assignment under article 24.01(b) was suggested to be one such example. However, it is said that clause 24.01(a) is not such a clause.

SPP also argues that the parties have chosen to impose an obligation of good faith in certain provisions of the JVA, which negates any implication of good faith elsewhere. The duty to negotiate in good faith prescribed by clause 18 of the JVA was proffered as one such example. However, it is well established that the duties to perform and negotiate in good faith are different legal creatures. I do not accept that this particular argument would defeat the implication of an implied term of the type contended for by Esso.

If clause 24.01(a) entitles SPP to assign to SPV in the manner and circumstances proposed, as I have found it does, there is no lack of good faith or fair dealing in SPP acting to promote its own interests consistently with the basis on which it may be taken to have entered into the contract.

At a glance

Court

Decision date

Before

Source

Judgment (239 paragraphs)

Parties

Cases Cited (13)