Eurogold Limited v Oxus Holdings

REASONS FOR JUDGMENT 1 This is an application pursuant to O 8 of the Federal Court Rules for leave to serve an application and statement of claim out of the jurisdiction. In support of their application, the applicants rely upon the affidavits of Peter Lynton Gunzburg, a director of each of the applicants, dated 4 August 2006 and 15 August 2006 respectively. 2 The first applicant, is a company whose shares are listed on the Australian Stock Exchange and the Alternative Investment Market. The second applicant is, and was at all material times, a wholly owned subsidiary of the first applicant. The second applicant holds and, at all material times held, all the issued shares in a company, Eurogold (Bermuda) Limited, which in turn, through subsidiaries, controls 99.72 per cent of the issued shares in a company called Saulyak LLC. Saulyak LLC is, and was at all material times, a company incorporated according to the laws of the Ukraine. 3 The Saulyak gold deposit is a body of gold bearing mineralisation situated near Dilove, in the state of the Ukraine. Saulyak LLC holds exploration licence 2146, an activities licence AA599600, and a related investment agreement, which together, permitted it to explore and perform trial mining of the Saulyak gold deposit. 4 The first respondent, which is incorporated in Malta, is a subsidiary of the second respondent, which is a company incorporated and carrying on business in the United Kingdom. 5 Exploration licence 2146 is the principal licence permitting Saulyak LLC to explore the Saulyak gold deposit. It expires on 21 November 2007. The licence is subject to a condition that by that date, a body known as the State Reserves Committee of the Ukraine, a Ukrainian government body, should have approved the reserves of the gold deposit, in the sense that, it should have approved the categorisation of, the volume of and grade of the ore body or bodies at the Saulyak gold deposit. 6 The evidence of Mr Gunzburg is that the Transcarpathian Geological Expedition, which is a Ukrainian government geological survey, classified the gold reserves at Saulyak gold deposit as equivalent to 578 000 ounces of contained gold at a cut‑off rate of 1.5 grams per ton in the former Soviet C1 and C2 categories. A report to that effect was issued by the Transcarpathian Geological Expedition in 2004. Although the Transcarpathian Geological Expedition, was a Ukrainian government body, the classification of the reserves by it does not amount to an approval of the reserves by the Ukrainian government. This is a task which must be performed by the State Reserves Committee. 7 On 30 April 2006, the applicants entered into an agreement ('the Sale Agreement') with the respondents whereby the first respondent agreed to take an assignment of, and to purchase assets of the applicants, described in the statement of claim as the 'Sale Assets'. The Sale Assets effectively comprised the rights, which I have already described, which permit Saulyak LLC to continue exploration and trial mining in relation to the Saulyak gold deposit. 8 By cl 9 of the Sale Agreement, the second respondent, which, as I have said, is the parent company of the first respondent, unconditionally and irrevocably guaranteed to the applicants, the due and punctual performance of the first respondent's obligations under the Sale Agreement. 9 The Sale Agreement also contained a clause, cl 10.3, which permitted the respondents to terminate the Sale Agreement if there was a material adverse change in circumstances affecting the Sale Assets. 10 On 28 June 2006, shortly before the Sale Agreement was due to be settled on 30 June 2006, the respondents served a notice of termination on the applicants pursuant to cl 10.3(b) of the agreement ‑ alleging that there had been a material adverse change in circumstances from what they had understood the circumstances to have been at the time of entering into the agreement. The material parts of the notice read: 'D. As at 30 April 2006, the Oxus Group understood that: (i) SLLC held two licenses that permit SLLC to carry out research and exploration activities at the Saulyak Gold Project: a. Activity License No. AA 599600 for carrying out natural resources exploration activity for a term ending on 24 December 2006 ("Activity License"); and b. Exploration License No. 2146 for the exploration, research and trial mining of the Saulyak Gold Project for a term ending on 21 November 2007 ("Exploration License") (together the "Licenses"); (ii) valid applications for extension of the term of the Licenses had been made by SLLC and the Oxus Group were not aware of any reason why the applications would not be granted; (iii) SLLC was diligently proceeding with its operations on the Licenses and that the Licenses were in good standing; (iv) a gold resource at the Saulyak Gold Project of 578,000 ounces had been classified under categories C1 and C2 being the categories adopted by the Cental Commission on reserves of the former USSR; (v) the 578,000 ounce gold resource at the Saulyak Gold Project had been approved by the State Committee of Reserves of Ukraine; (vi) Eurogold's public announcements and those of its independent consultants confirmed that the gold resource at the Saulyak Gold Project to be defined at 578,000 ounces as classified under categories C1 and C2 and being "Ukrainian Government Approved". E. Since 30 April 2006, it has become apparent to the Oxus Group that: (i) the application for the grant of the extension of the Licenses appears to have been refused. Applications for new permits and/or licenses to replace the Licenses appear to have also been refused or are in due course likely to be refused; (ii) on or about 21 to 24 March 2006 the Board of Geological State Inspection found matters including the following: a. a real risk of non fulfilment of special licence conditions and work commitments of the Exploration License and/or the Activity License; b. the report for the Calculation of the Reserves and Gold Resources at the Saulyak Gold Project (1 May 2003) gives untrue figures for the approved reserves for C1 and C2 categories; c. as of March 2006, most of the operations required for getting data for reserves calculation have not been commenced; (iii) the Central Commission on reserves of the Ministry of Geology USSR has approved a resource at the Saulyak Gold Project in 1984 of only 2.768 tonnes (88,993 ounces) of gold under C1 category and 8.556 tonnes (275,082 ounces) of gold under the C2 category, a total of 11.324 tonnes (364,075 ounces) under categories C1 and C2; and (iv) the attempts by Eurogold and SLLC to increase the resource at the Saulyak Gold Project to 578,000 ounces under categories C1 and C2 have been rejected by the State Committee of Reserves of Ukraine. F. The matters referred to above constitute a material adverse change since the date of the Agreement to the financial position and assets of the EBL Group as understood by the Oxus Group at the date of the Agreement ("Material Adverse Change").' (original emphasis) 11 The applicants treated the service by the respondents of the termination notice as a repudiation by the respondents of the Sale Agreement. By a letter dated 31 July 2006, the applicants advised the respondents that they accepted what they characterised as the respondents' repudiation of the agreement and terminated the agreement. 12 The application, in this case, arises by reason of those events, or by reason of facts associated with those events. 13 There are four causes of action which are pleaded in this application. 14 The first cause of action pleaded is a claim for damages for breach of contract, arising from the alleged repudiation of the Sale Agreement. 15 There are also two causes of action for relief under s 87 of the Trade Practices Act 1974 (Cth) ('the TPA') by reason of contraventions of s 52 of the TPA. These causes of action are founded on two separate publications. The first is in relation to the notice of termination of 28 June 2006; the second is based on a statement relating to the termination of the Sale Agreement, which has appeared on the respondents' website, which is downloadable in Australia and has been downloaded in Australia. 16 The fourth cause of action arises from a dispute as to the construction of a loan agreement dated 9 June 2006 ('the Loan Agreement') between the second applicant and the first respondent, whereby the first respondent agreed to advance funds of USD416 000 to the first applicant for the purpose of, inter alia, exploring the Saulyak gold deposit. The monies were advanced. The first respondent now claims that the monies should be repaid from the proceeds of a share placement made by the first applicant. An issue arises as to whether, on the proper construction of the Loan Agreement, the sum is repayable. Order 8 of the Federal Court Rules 17 Order 8 r 3 provides: '3 Application for leave to serve originating process outside Australia (1) Service of an originating process on a person in a foreign country is effective for the purpose of a proceeding only if: (a) the Court has given leave under subrule (2) before the application is served; or (b) the Court confirms the service under subrule (5); or (c) the person served waives any objection to the service by entering an appearance in the proceeding. (2) The Court may give leave to a party to serve an originating process on a person in a foreign country in accordance with a convention or the law of the foreign country, on such terms and conditions as it considers appropriate, if the Court is satisfied that: (a) the Court has jurisdiction in the proceeding; and (b) the proceeding is of a kind mentioned in rule 2; and (c) the person seeking leave has a prima facie case for the relief claimed by the person in the proceeding. …' Jurisdiction 18 The Court's jurisdiction is invoked by the claims which are founded on the TPA contraventions. The claims which relate to the breach of the Sale Agreement and the proper construction of the Loan Agreement, fall within the accrued jurisdiction of the Court. Compliance with O 8 r 2 of the Federal Court Rules 19 The next requirement is that the applicants must demonstrate that the 'proceeding is of a kind' included within the items specified in O 8 r 2 of the Rules. In my view, the applicants have satisfied that requirement. The Sale Agreement contained a choice of law clause which stated that the agreement was governed by the laws of Western Australia (Item 3(c)). Further, that the causes of action based on contraventions of the TPA seek relief in relation to damage suffered wholly or partly in Australia (Item 12). The claim in relation to the Loan Agreement affects property in Australia, namely, the proceeds of the placement of shares in the first applicant to which the first respondent lays claim (Item 6). Prima facie case 20 The next question is whether the applicants have demonstrated a prima facie case in relation to the four causes of action which are pleaded. The test in relation to whether the applicants have demonstrated a prima facie case is set out by French J in the case of Western Australia v Vetter Trittler (1991) 30 FCR 102 at 109 where his Honour adopted the following observations by Heerey J in the case of Merpro Montassa Ltd v Conoco Specialty Products Inc (1991) 28 FCR 387: 'It need only be added that the requirement of O 8, r 2(2)(c) has to be met at the outset of the proceedings. It does not suggest the kind of scrutiny that would occur in a submission of no case to answer following the closure of an applicant's case at trial. As a matter of practicality, one is here concerned with Sheppard J's words, "evidence which discloses in a little detail what the facts are…" It may be therefore that a court at this stage might draw inferences more readily in favour of an applicant, bearing in mind, amongst other things, that the applicant will not have had the advantage of discovery, subpoena and other procedural aids to the making out of the prima facie case at trial.' 21 And French J went on to say at 110: 'I would add that, whatever is required to satisfy the court that there is a prima facie case, that satisfaction should leave open the possibility that the respondent once served could move to strike out the statement of claim or invoke other provisions of the rules which provide for summary disposition of proceedings. To the extent that it does not, the rules may be setting too high a threshold for service out of the jurisdiction. It is notable that the merit requirement of service out of the jurisdiction in England is expressed in the formula that it be "made sufficiently to appear to the Court that the case was a proper one for service out of the jurisdiction":…In my opinion however, for the purposes of the existing O 8, r 2(2,) a prima facie case is made out if, on the material before the court, inferences are open which if translated into findings of fact, would support the relief claimed.' 22 In addition, it is not necessary for an applicant seeking leave to show a prima facie cause of action in respect of each of the causes of action pleaded. The authority for that is Bray v F Hoffmann‑La Roche Limited (2003) 130 FCR 317. 23 I will deal with the first of the causes of action under the TPA. The applicants say that the misrepresentation arises from a statement in the notice of termination to the effect that the applicants had sought an extension of the Saulyak licence in the Ukraine which appears to have been refused - which, it is said, contained an inference that it was unlikely that the applicants would be permitted by the Ukrainian authorities to continue to explore and mine the Saulyak gold deposit; and the fact that the respondents knew that the first applicant would be obliged to republish the substance of the statement to the Australian Stock Exchange. 24 The respondents' statement was repeated in the first applicant's release to the stock exchange dated 11 June 2006. However, there was also contained in the body of the press release a statement from the first applicant itself, refuting the allegation made by the first respondent. The first applicant's statement said that the applicants had not sought an extension of the Saulyak licence, the licence is not due for review until November 2007, and progress under the approved work programmes is regularly reviewed by the authorities. 25 Accordingly, the statement which was published to the stock exchange contains both an allegation made by the respondents and a rebuttal by the applicants. This raises the question of whether the statement made by the respondents would in that context be construed by ordinary and reasonable members of the receiving audience, as creating a misleading impression that the application for the licence extension appears to have been refused ‑ an impression which could be damaging to the first and second applicants. 26 Counsel for the applicants submitted that the document which was published to the Australian Stock Exchange must be looked at as a whole, with the consequence that the respondents' statement would still have a damaging effect because it was open to a reasonable reader to construe the release as containing no more than assertion and counter assertion. 27 There is some analogy here with defamation law where the courts have recognised the concept of the bane and antidote. In defamation cases it will be 'comparatively rare' for an antidote to be sufficient to dispel the mischief of the bane (Morosi v Broadcasting Station 2GB [1980] 2 NSWLR 410 at 419). At this stage in the proceedings, where all that is required to be shown is a prima facie case in the sense which I have outlined above, I am prepared to accept, although not without some hesitation, that the applicants have overcome the hurdle of demonstrating a prima facie case. 28 The second of the causes of action alleging a contravention of the TPA, is based on a statement published on the respondents' website. The impugned statement is to the effect that the respondents had issued the notice terminating the Sale Agreement because a material adverse change had occurred since entering the agreement, including becoming aware that the number of C1\C2 reserves ounces actually approved by the Ukrainian government in respect of the Saulyuk gold deposit, was significantly lower than 578 000 ounces, a figure which the respondent had understood to be the approved amount. 29 The respondents allege that the statement is misleading because the Ukrainian government had not approved any C1/C2 reserves, and the respondents had misstated their understanding of the true position in relation to the obtaining of approval of the reserves. The applicants alleged that because of their due diligence activities, the respondents knew there was a distinction between classification of 578 000 ounces by the Transcarpathian Geological Expedition in 2004, and the classification of the Saulyuk ore reserves by the Ukrainian government body, the State Reserves Committee, which had not yet been obtained, and in respect of which, efforts were still being made to achieve that end. I am satisfied, on the basis of Mr Gunzburg's evidence, that there is a prima facie case in respect of this cause of action. 30 The third of the causes of action is the claim for damages arising from the alleged repudiation of the Sale Agreement. There is in Mr Gunzburg's affidavit of 4 August 2006, evidence from which inferences can be drawn, that the respondents were, as a consequence of due diligence investigations they had carried out, made aware before entering into the Sale Agreement, of the status of Ukrainian government approvals in relation to the exploration licence and the nature and extent of work that was required to be done under the work programme. 31 The onus of establishing that there was a material adverse change of circumstances is on the respondents (ANZ Banking Group Limited v Pan Foods [1991] 1 VR 29 at 44). There was annexed to Mr Gunzburg's supplementary affidavit of 15 August 2006, a copy of the report from the Board of Geological State Inspection, which is referred to in the notice of termination. The translation of the document is less than perfect. The document does contain some statements which suggest that there are some difficulties ahead of Saulyak LLC in its efforts to complete the work programme by the expiry date of the licence and to obtain the necessary approval. However, I am not satisfied that the onus which would be placed upon the respondents to demonstrate that there was a material adverse change in circumstances would necessarily be discharged by them at trial. I am satisfied, therefore, on the basis of Mr Gunzburg's evidence, and, because the onus would be on the respondents, that there is a prima facie case in relation to the contractual claim founded on the alleged repudiation of the Sale Agreement. 32 As to the Loan Agreement, that cause of action turns upon the construction of a clause in the Loan Agreement. I am satisfied, having looked at that clause, that there is a prima facie case in relation to that cause of action. 33 Further, insofar as the discretion is concerned, I am satisfied that the connecting factors between the causes of action and the Commonwealth are sufficient and I would not, therefore, exercise my discretion against permitting service out of the jurisdiction. 34 There is the affidavit dated 2 August 2006 of Fiona Joan Callanan, a solicitor of the Supreme Court of England and Wales, who deposes that s 725(1) of the Companies Act 1985 (UK) permits service of originating process by leaving the documents at, or sending them by post to, the company's registered office. There is also the affidavit of Laura Anne Del Fuoco of 3 August 2006 deposing that the proper method of service in Malta is through the diplomatic channel. 35 Accordingly, I will make orders in terms of the notice of motion of 4 August 2006. I certify that the preceding thirty‑five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.