Heggies Bulkhaul v Global Minerals

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2810/01 HEGGIES BULKHAUL LTD V GLOBAL MINERALS AUSTRALIA PTY LTD JUDGMENT 1 HIS HONOUR: In these proceedings the plaintiff seeks specific performance of an alleged agreement for a long-term lease of a quarry. By its cross-claim the defendant alleges that the plaintiff is in breach of terms of the tenancy under which it occupies the quarry. The breaches include failure to pay all of the royalties due under the tenancy, failure to restore and rehabilitate the land after mining, the carrying out of unauthorised mining works, and failure to provide the defendant with notices, consents and the like. The plaintiff contends that there are no such breaches, but that if the tenancy has been breached, it is entitled to relief against forfeiture. It also makes a money claim. 2 On the application of the plaintiff, the case was set down for expedited hearing on 10 December 2001. The facts proved to be complex and the hearing was not completed on those days. The case was adjourned, part heard, to 22 April 2002. 3 On 22 April 2002, when the hearing resumed, the defendant moved by notice of motion for the further hearing dates to be vacated, and for leave to reopen its case after an adjournment that would give it sufficient time to conduct a proper audit of weighbridge dockets and invoices to ascertain whether royalties paid to it had been correctly calculated. The defendant claimed to have discovered, in the days before the hearing resumed, that information as to the basis for the calculation of royalties, supplied to it by the plaintiff in October 2001 pursuant to an order of the Court and marked as exhibit LFH 1, was inaccurate in significant ways. 4 I decided that, although the application was made very late, the interests of justice required that I should hear it. Consequently, after hearing the remaining oral evidence in the proceedings but without taking final submissions, I heard the evidence and submissions of the parties on the defendant's application. That process was completed at the end of the second of the three days allocated to the final hearing. 5 The evidence on the application showed, for the first time, that substantial quantities of materials variously described as "decomposed basalt" and "clay" had been removed from the quarry and supplied to Wingercarribee Shire Council, without payment of royalties on those materials. The plaintiff submitted that I should adjourn the hearing for a short time, and vacate the remaining hearing day, to allow it to reply to the defendant's evidence on the "clay issue", but that I should not give the defendant time to conduct the full audit that it wished to undertake. The defendant sought an adjournment for a longer period, never specified precisely, to give it time to conduct the audit. 6 After hearing argument, I informed the parties on 24 April 2002 that I had decided to vacate the remaining hearing day and to adjourn both the defendant's application to re-open, and the proceedings, to the three days beginning 6 May 2002. Both parties informed me that it was unnecessary for me to deliver reasons for my decision, and so I did not do so. However, it should have been obvious to the parties that I had reached the conclusions that · the defendant had not shown that the proposed audit was likely to demonstrate a variance between actual royalties paid and royalties that should have been paid, materially greater than the figure emerging from the expert evidence that I had heard in December 2001, and · that being so, the likely prejudice to the plaintiff's commercial interests that would be caused by a substantial delay in the conclusion of the hearing outweighed the prejudice that the defendant would suffer through being denied the opportunity to conduct the proposed audit. 7 When the matter was before me for mention on Thursday 2 May 2002, I was shown a letter from the plaintiff's solicitors to the defendant's solicitors dated 2 May 2002 (now Exhibit DX 6) which stated that Exhibit LFH 1 was inaccurate and could no longer be relied on. Not surprisingly, counsel for the defendant foreshadowed that his client would make an application on 6 May 2002 that the hearing dates of 6, 7 and 8 May 2002 be vacated, and that appropriate orders be made for the conduct of the audit that the defendant had previously sought. 8 The defendant made that application at the commencement of the hearing on 6 May 2002. I decided that I should hear the application forthwith, before hearing the evidence on the "clay issue" that would conclude the evidence in the final hearing. The whole of 6 May 2002 was taken up hearing the defendant's application. At the end of the day I announced my decision to grant the application. I vacated the hearing dates of 7 and 8 May and stood the matter over to 13 May 2002, for the purpose of making orders for the determination by a court-appointed expert of the amount of the royalties properly payable by the plaintiff to the defendant under the lease for a specified period. I gave directions for written submissions as to the appropriate period to be identified in the orders, and as to whether I should order the plaintiff to pay the defendant's costs on an indemnity basis for the application heard on 6 May and for the application heard on 22 and 24 April 2002. 9 I shall now set out my reasons for deciding to grant the defendant's application. I shall also deal with the appropriate period to be covered by the expert's inquiry, and with the question of indemnity costs. 10 Clause 4.08 of the lease between the parties dated 10 November 1995 is in the following terms: "4.08 Records To keep or cause to be kept on the Land or neighbouring premises proper sales records recording the sale of all Minerals from the Land including Weighbridge records made up on an Accounting month basis and the Lessee will use its best endeavours to ensure that the same are true accurate and complete in all respects and wherein shall be entered the Minerals got by virtue of this Lease with the dates of production or receipt and all such particulars as may be necessary or convenient for ascertaining of the amounts of the Royalties to be paid hereunder and to permit the Lessor or his agent at all reasonable times to inspect the said sales records and to take copies thereof or abstracts there from. The Lessee shall at the expiration of every Accounting Month deliver to the Lessor a statement of all material removed from the Land, along with a listing of all sales of Minerals detailing tonnage and gross sales value excluding cartage for each sale of Minerals for that Accounting Month." 11 Both parties accept that this clause was applicable to them at all relevant times, whether the plaintiff was in occupation under the terms of the old lease or under the terms of a new agreement for lease. 12 On 19 October 2001 I made an order directing the plaintiff to serve on the defendant all statements required pursuant to clause 4.08 of the lease, by 26 October 2001. On 28 October 2001 the plaintiff produced a printout of a computer spreadsheet which became, in due course, Exhibit LFH 1. That material was produced in purported compliance with the Court's order. Nothing was said to suggest that the plaintiff regarded the material as anything less than full and proper compliance with the order. 13 The defendant obtained access to a substantial volume of invoices and weighbridge dockets for the purposes of the hearing. Some invoices and dockets with respect to recent sales were obtained by the defendants on 11 April 2002. When Mr Harris, the solicitor having carriage of the matter for the defendant, inspected those records he found what he regarded as substantial discrepancies between them and Exhibit LFH 1. His affidavit setting out the alleged discrepancies became the basis for the defendant's application of 22 April 2001. 14 Once the evidence on that application had been fully heard, it appeared that discrepancies of three kinds had been identified. First, it emerged that no royalties had been paid with respect to the plaintiff's sales of clay to Wingercarribee Shire Council. That was an issue that clearly had to be addressed, and as I have said, I made orders in April directing further evidence to be filed on the "clay issue" on a very short timetable. 15 Secondly, there were discrepancies relating to "Joannou". That name referred to materials brought into the plaintiff's quarry from a neighbouring quarry, to be mixed with materials in the plaintiff's quarry to produce "brickies' sand". There was no need to pay any royalty on the Joannou materials because they were being brought into the plaintiff's quarry rather than being extracted from it, and royalties were payable on brickies' sand only to the extent that the sand included materials extracted from the plaintiff's quarry rather than the Joannou quarry. Thirdly, various discrepancies of other kinds were identified that were arguably just miscellaneous mistakes referable to no general pattern. 16 In my view, the officers of the plaintiff who were providing instructions to the plaintiff's solicitors were aware, or ought to have been aware, when the plaintiff prepared and produced Exhibit LFH 1, that this information would be used by the defendant to compare the recorded particulars with weighbridge dockets and invoices to which the defendant had gained access. The extent of the reliance placed by the defendant became manifest in April 2002 when the defendant announced its application to vacate the April hearing dates. The plaintiff defended the accuracy of Exhibit LFH 1 (except, after the April hearing, with respect to the "clay issue") right up to 2 May 2002, two business days before the date of resumption of the hearing. 17 The evidence adduced at the April hearing established that Exhibit LFH 1 was not accurate because it made no reference to the sales of clay to Wingercarribee Shire Council, and because of the other miscellaneous inaccuracies identified in Exhibit LFH 3. The evidence adduced on 6 May 2002 showed some additional inaccuracies (see Exhibit LFH 7), miscellaneous but sufficiently numerous to be worrying. More importantly, the evidence on that day made it clear that Exhibit LFH 1 could never have been an accurate record of revenue from product sales. This was because the information from which it was compiled was based on invoices recorded electronically, which did not routinely separate the price paid for the product ("the exbin price") from the cost of haulage. In order to provide figures on product sales, an employee of the plaintiff manually altered invoice prices to remove the haulage component. This work was done by Mr Boulais, who appears to have made estimates of product prices based on contemporaneous invoices and his general pricing knowledge. The process was inherently unsatisfactory and bound to lead to mistakes, and mistakes were in fact exposed by the evidence given on 6 May 2002. 18 Mr Boulais gave evidence that accurate product prices for the period prior to December 1999 could be obtained by recourse to the information recorded on weighbridge dockets and invoices, supplemented by information recorded in the plaintiff's "Job Master" computer program, which identified haulage charges and product prices for customers. However, since many thousands of dockets and invoices were involved, the task would be an extremely time-consuming one. For sales after December 1999, there were weekly computerised reports based on invoices, which could be used together with the Job Master to ascertain prices received on product sales. However, the system did not at any stage routinely break down invoice prices into their components of product sales and haulage, and therefore at no stage was information accumulated on a sale by sale basis recording the revenue from product sales as distinct from revenue from haulage. It follows that at no stage has the plaintiff recorded the information which, under clause 4.08 of the lease, it is required to supply to the lessor (the defendant since December 1999, and its predecessor before that time) on a monthly basis. 19 Mr Boulais gave evidence that he informed the managing director of the plaintiff, Mr Rankin, and other senior executives of the plaintiff, that the plaintiff's systems did not allow him to isolate products sales revenue from haulage revenue. He said he presented his superiors with a number of options and then on their instructions, following the methodology outlined above, he produced Exhibit LFH 1. This evidence implies that Mr Rankin was aware of the deficiency in Exhibit LFH 1 before it was prepared and produced. Yet he did nothing to bring the deficiency to the attention of the defendant or the Court. The plaintiff produced Exhibit LFH 1 in purported full compliance with the order of the Court. It was only on 2 May 2002, after the December 2001 hearing and the April 2002 hearing, that the plaintiff finally informed the Court of what Mr Rankin, Mr Boulais and others had known since Exhibit LFH 1 was created in October 2001, namely that the information about product sales contained in the exhibit was deficient. 20 Further, it emerged in evidence on 6 May that there are weekly records produced by the plaintiff that can be used as a basis for calculation of sales revenue, in conjunction with the Job Master program. At no earlier stage have any of these reports been produced, notwithstanding the statement by Mr Rankin in his affidavit made on 4 December 2001, in which he described the reports that could be created using data inserted in the plaintiff's computerised accounts system, but made no mention of the system of weekly recording of which Mr Boulais eventually gave evidence. 21 In these circumstances, I am not satisfied that the defendant has been given, at any stage, an adequate opportunity to consider the documents of the plaintiff that form the basis for royalty calculations. The defendant has been given a spreadsheet summary which senior officers of the plaintiff have known at all times to be inaccurate, and the plaintiff now admits to be unreliable, and has not been given the weekly reports and Job Master program that would have permitted proper calculations to be made for the period from December 1999 to date. Mr Boulais said that this information was available, but he acknowledged that Mr Stafford of the defendant could not have accessed it from his own computer. 22 It appears to me that the appropriate course now is to make orders designed to establish the proper amount of royalties that should have been paid for the appropriate period. 23 As to the appropriate period, the plaintiff accepts that there is an argument (to be determined at the final hearing) that it may be liable to pay the defendant royalties which may be found unpaid prior to the registration of the defendant as proprietor of the land. It submits that the period for which the expert ought to examine the question of royalty obligations is the period of the lease: namely, 10 November 1995 to 9 November 2000, and (although the defendant denies the existence of any agreement for lease) the period 10 November 2000 to 9 November 2001. The defendant submits that the period of inquiry should also include the period 10 November 2001 to 30 April 2002. This is on the ground that the inquiry should determine the real questions raised in the proceedings (Supreme Court Rules, Part 20 rule 1 (2); noting TCN Channel 9 Pty Ltd v Antoniadis (1998) 44 NSWLR 682, 690) and avoid the necessity of similar proceedings having to be conducted by the parties; McCarthy v McIntyre (Federal Court of Australia (Beaumont J), 6 November 1997, unreported). In my view, taking these submissions into account, the period for which the expert should be required to report is the period from 10 November 1995 to 30 April 2002. 24 In my view, the best way of ascertaining the correct amount of royalties is for the Court to appoint an expert to make that determination under Part 39 of the Supreme Court Rules. That is likely to lead to a more economical and efficient process than an order referring the matter out under Part 72. Having reached the conclusion, on 6 May 2002, that this was the best way forward, I stood the matter over so that the parties could negotiate the selection of an appropriate expert. 25 The determination by the expert will consume some time and according to the evidence, the inevitable delays will cause prejudice to the plaintiff. Mr Rankin gave evidence that the plaintiff is losing $100,000 per month in the quarry operation, and that it wishes to sell the quarry but it is inhibited from doing so by the uncertainty surrounding the lease. Although that evidence was challenged in cross-examination, I am prepared to accept it for the purposes of the present application. The evidence means that the delay to be occasioned by my orders will cause serious prejudice to the plaintiff. But I do not accept that the plaintiff would thereby be unfairly prejudiced. The defendant is entitled to the information about product sale prices upon which the royalties are calculated, under clause 4.08 of the lease. I made an order intended to recognise the defendant's right to that information as long ago as 19 October 2001. The information should have been provided by the plaintiff without such an order, having regard to the terms of the lease, and it should certainly have been provided, accurately and fully, once the order was made. The information eventually provided in response to my order was known by senior officers of the plaintiff to be defective from the outset, and they allowed the defendant to rely on that information for 6 months, in which two substantial court hearings took place, before admitting to its deficiency. The delay that will necessarily be involved in getting to the truth with respect to royalty calculations is a delay brought upon the plaintiff by the conduct of its senior officers. The plaintiff is in no position to complain of prejudice caused by that delay. 26 I have considered whether it would be feasible to deal with the urgent and pressing questions regarding the existence and validity of the lease before the expert determination of royalty payments has been made, on the basis that the expert's determination can lead only to an order for the payment of money, as to which there is no equivalent urgency. I have rejected this course. One of the issues with respect to the tenancy is whether, if there have been breaches, I should grant relief against forfeiture. The resolution of that issue requires the Court to exercise a discretion based upon equitable considerations. While the Court ordinarily grants relief against forfeiture to a tenant who tenders payment of moneys outstanding under the lease, the position may well be different where the evidence shows that the tenant has persistently resisted the landlord's attempts to obtain information relevant to the calculation of moneys owing, to which it is entitled under the lease. It is possible, when the expert's report is available and all the evidence is in, that it would point to conclusions of this kind. 27 Additionally, the evidence with respect to unpaid royalties may reflect on the credibility of Mr Rankin as a witness. My conclusion as to Mr Rankin's credit will be relevant not only to the question of unpaid royalties but also to the question whether the plaintiff has discharged its obligations of restoration and rehabilitation. There is a conflict between the evidence of Mr Rankin and Mr Stafford as to whether Area 18 was still being mined in December 2001. 28 At the hearing on 6 May 2002 the defendant relied on the affidavits and oral evidence of Mr Harris, the solicitor having carriage of the matter for the defendant. Mr Harris identified discrepancies between certain invoices issued in December 1999 in respect of weighbridge dockets for the month December 1999 and some invoices and information contained in Exhibit LFH1 for the month of December 1999. He also extrapolated from some comparisons of weighbridge dockets and invoices for that month, made by Mr Stafford, the proposition that royalties for the 1999/2000 year had been underpaid by at least $37,105.50. Mr Harris was cross-examined skilfully by counsel for the plaintiff. The cross-examination demonstrated that Mr Harris had made a number of assumptions that were not supported by evidence or were subject to dispute. Counsel then submitted that I should give no weight to the evidence of Mr Harris. 29 I am satisfied that Mr Harris did his best, under pressure, to put together plausible affidavits based on discrepancies that he had discovered. He had very little time to do so. I reject the criticism levelled against him that he deliberately failed to refer to evidence that tended to undermine his contentions, such as evidence with respect to a possible agreement to reduce the royalty rate from 12.5 percent to 11 percent and a possible agreement to increase the tonnage upon which the minimum royalty amount was payable from 250,000 to 350,000 tonnes. But I accept the submission by counsel for the plaintiff that Mr Harris' evidence of the amount of the deficiency in royalties for the year 1999/2000 should not be given weight for the purposes of the present application, since that evidence is based on questionable assumptions. It is not necessary for me to say more about the matter here because, although I discount Mr Harris' evidence, I have decided that the defendant's case is amply made out, particularly having regard to the evidence of Mr Boulais in cross-examination. 30 I turn to the question of costs. The defendant claims its costs of the application heard on 6 May 2002, in which it was successful, and also its costs of the application heard on 22 and 24 April 2002, in which it was unsuccessful. It claims costs on an indemnity basis. Its ground for doing so is that the plaintiff produced a document (pursuant to its obligations under the lease and as a result of an order of this Court) which it knew was inaccurate, and which it ultimately admitted could not be relied upon. The defendant says that senior executives of the plaintiff knew or ought to have known that the defendant would be likely to rely on the document in the preparation of its case, yet the plaintiff gave no warning as to the risks associated with relying on the document. I have found that these contentions by the defendant have been made out. 31 In Oshlack v Richmond River Council (1998) 193 CLR 72, Gaudron and Gummow JJ observed (at 89), in the course of discussing the breadth of the Court's jurisdiction with respect to costs: "It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a "solicitor and client" basis or on an indemnity basis. The result is more fully or adequately to compensate the successful party to the disadvantage of what otherwise would have been the position of the unsuccessful party in the absence of such delinquency on its part." 32 The plaintiff accepts that there has been some "relevant delinquency" on its part and that there arises a discretion to award costs against it, other than on the usual basis. It submits, however, that the Court ought not to make any decision on costs until all the relevant material is before it. According to the plaintiff, the correct order (indeed the order sought by the defendant in its application commenced on 22 April 2002) is that costs be reserved. 33 The plaintiff submits that the evidence which will be available from the investigations and report of the Court-appointed expert can be expected to shed light on questions of costs, as it will go to the systems maintained by the plaintiff, including the integrity of those systems, as well as to the attitude of the plaintiff towards its obligations under the lease. That may well be so. However, the evidence before me now has led me to make the findings contended for by the defendant. Those findings establish a degree of delinquency that justifies an award of costs on an indemnity basis. It is the kind of "misconduct [that] has caused loss of time to the Court and to other parties": Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; see also Robinson v Aware Industries Ltd (Federal Court of Australia (Weinberg J), 1 October 1998, unreported). 34 Because the plaintiff's misconduct created a false basis for the application which was heard on 22 and 24 April 2002, I have no hesitation in concluding that the order for indemnity costs should extend to that application as well as the one made on 6 May 2002. Had the Court been aware of the deficiencies in Exhibit LFH 1 when it heard the application of 22 and 24 April 2002, I am sure that the outcome of that application would have been different. 35 The matter will return to me on 13 May 2002 for the purpose of my making orders for the appointment of an expert, and otherwise to give effect to these reasons for judgment. **********

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