Macarthur Coal Limited and Anor v MCG Coal Holdings Pty Ltd and Ors [2012] QSC 125

[1] The trial of this case had been set down for 10 hearing days commencing on 30 January 2012. A few days prior to then, those of the defendants who were contesting the plaintiffs' case announced that they would not continue to do so. When the matter was called on for trial, they agreed to orders for effectively all of the relief which was sought by the plaintiffs. There was also an agreement that the plaintiffs should recover their costs of the proceedings from two of those defendants, the third and fifth defendants. No order for costs was sought against the second defendant which had defended the case upon the instructions of the fifth defendant, Mr McDonald. That is because the outcome of the litigation was that the plaintiffs would own 90 per cent of the shares in the first defendant which owns all of the shares in the second defendant.

[2] What remains is an argument about the basis for assessment of those costs. The plaintiffs seek their costs upon the indemnity basis. Their principal argument is that although there was no trial, it can be seen that the defence of the second, third and fifth defendants was bound to fail and that the conduct of the third and fifth defendants in resisting the proceedings was so unreasonable as to warrant indemnity costs. There is a further argument that the third and fifth defendants made and persisted with allegations of impropriety against senior officers of the first plaintiff, without any factual or evidentiary basis.

[3] It is necessary to say something of the factual background. In August 2010, the second defendant was proposing to complete a contract for the purchase of a mineral development licence ("MDL162"). The second defendant was a wholly owned subsidiary of the first defendant and had as its sole director, Mr McDonald. The first defendant had three directors who were Mr McDonald, the sixth defendant Mr Crawford and the seventh defendant Mr MacKinnon. The then shareholders of the first defendant were the third defendant (as to 40 per cent) and the fourth defendant (as to 60 per cent). The third defendant was a company effectively owned and controlled by Mr McDonald. The fourth defendant had three directors, Messrs McDonald, Crawford and MacKinnon.

[4] The second defendant needed funds to complete its purchase of MDL162. During August 2010, there were negotiations with the first plaintiff for the provision of those funds, which resulted in the written contract described as a Loan Facility Agreement made on 1 September 2010 ("the LFA"). The parties to the LFA were the first plaintiff and the first, second, third and fourth defendants. The intention of the parties was that the first plaintiff, through its wholly owned subsidiary the second plaintiff, would become the holder of 90 per cent of the issued shares in the first defendant. The third defendant's shareholding would become four per cent and the fourth defendant's shareholding would become six per cent of that company. MDL162 would be developed and operated as a coal mine effectively as a joint venture between the three shareholders.

[5] But at the date of the LFA, the necessary approval of the Commonwealth Treasurer had not been obtained for this transaction. Therefore, it was agreed that the first plaintiff would lend to the first defendant the funds required to complete the purchase of MDL162 (and some further funds) and that once that approval was obtained, the first plaintiff would be entitled to have issued to it or its nominee shares in the first defendant to make it a 90 per cent shareholder. The debt would thereby be converted to equity.

[6] The amount to be lent was $360 million. This was duly advanced by the first plaintiff on 1 September 2010. On the same day, the second defendant completed its purchase of MDL162 (and a related real property) for the sum of $285 million. On 20 October 2010, the necessary approval was obtained entitling the first plaintiff to be issued 90 per cent of the shares of the first defendant. On three occasions the parties agreed to extend the date for the issue of those shares. Ultimately the due date became 1 March 2011. On 28 February 2011, pursuant to the LFA, the first plaintiff gave notice of its nomination of the second plaintiff to subscribe for the shares and other relevant notices were given by the second plaintiff.

[7] The shares were not issued to either of the plaintiffs. They gave a notice to complete on or about 15 April 2011, calling for completion on 10 May 2011. The first and second defendants refused to complete.

[8] These proceedings were commenced on 24 May 2011, the plaintiffs claiming specific performance of the LFA.

[9] As I have said, the resistance to the plaintiffs' claim came from Mr McDonald in the case pleaded by him and by the second and third defendants, each company being then under his control. The facts which I have outlined were not disputed. But it was alleged that the LFA should be terminated, or at least specific performance should be refused, upon several legal bases, all of which had the same factual foundation. In essence, the case for these defendants was as follows.

[10] The second, third and fifth defendants alleged that they made it clear to the first plaintiff, during the negotiations in August 2010, that it was of critical importance to them that MDL162 be developed expeditiously so that they could obtain a "royalty stream for their minority interest". In those negotiations, the defendants provided the first plaintiff with two reports by consultants, respectively described as the JT Boyd Report and the Nomura Report. Those reports contained or referred to a plan for the development of MDL162 so as to have production from the mine commence in 2014. The JT Boyd Report, which was relevantly adopted by the Nomura Report, expressed the opinion that low quality thermal coal should not be mined from this tenement but that it should be developed by mining only those seams which would produce semi-hard coking coal. In effect, the defendants alleged that the negotiations with the first plaintiff were upon the premise of the correctness and reliability of those reports.

[11] From August 2010 until 18 February 2011, the first plaintiff was alleged to have expressly and by implication represented to the second, third and fifth defendants that it intended to and would develop MDL162 over a period to 2014 and that it intended to do so so as to enable coal production to commence "shortly after 2014". During the same period the first plaintiff was alleged to have represented that it intended to and would develop MDL162 in conformance with the Nomura Model and that it would "not act in a manner that was inconsistent with the common intention of the parties to the [LFA] to develop MDL162 to achieve coal production at the earliest possible time". Particulars were given referring to conversations between Mr McDonald and representatives of the first plaintiff between 1 August and 1 September 2010.

[12] The defendants alleged that, in truth, the first plaintiff did not have these intentions for the development of MDL162 and that instead it had in mind some delayed development of the mine and one which would not be limited to the production of semi-hard coking coal. That was said to have been revealed to the defendants on 18 February 2011 when the first plaintiff provided to Mr Doon, the Resource Manager of the MCG group of companies, a model described in the pleading as "the Macarthur model". The alleged purpose of the Macarthur model was to suggest that the mining of MDL162 would be less profitable than was truly the case and to justify the deferral of the development of MDL162. In paragraph 38 of the pleading, the second, third and fifth defendants alleged:

"38. The Macarthur model is a sham and has no proper technical, geological or financial foundation with respect to MDL162."

[13] The conduct of the first plaintiff, in misrepresenting its intentions with respect to the development of the mine, was said to have been misleading or deceptive or likely to mislead or deceive, in contravention of s 52 of the Trade Practices Act 1974 (Cth) (TPA).

[14] The defendants pleaded that in reliance upon that misleading conduct, the first, second, third and fourth defendants entered into the LFA and subsequently agreed to vary it to extend the date for completion of the share subscription as I have mentioned. They alleged that the first, second, third and fourth defendants would not have entered into the LFA or extended those dates had the first plaintiff not engaged in that conduct.

[15] In their counterclaim, the second, third and fifth defendants alleged that they had suffered or were likely to suffer loss or damage by that conduct. The particulars given were that the first plaintiff intended to defer development of MDL162 until 2017 or later, resulting in "any profits which [the second, third and fifth defendants] reasonably expected to derive from the project [being] delayed many years or entirely lost". They counterclaimed for relief under s 87 of the TPA to the effect of defeating the plaintiffs' claim to be issued shares in the first defendant.

[16] Upon essentially the same facts, they pleaded that the first plaintiff owed a fiduciary obligation to the second, third and fourth defendants, which it would breach by delaying the development of MDL162 and using it not for the profitable production of semi-hard coking coal but for thermal coal.

[17] Alternatively it was alleged that if the first plaintiff subscribed for shares in the first defendant, it proposed to cause the first defendant to act in a manner which was oppressive to, unfairly prejudicial to or unfairly discriminatory against the third and fourth defendants within the meaning of s 232 of the Corporations Act 2001 (Cth). Upon that basis they pleaded that a decree of specific performance as sought by the plaintiffs would "facilitate [the first plaintiff] acting in relation to [the first defendant]" in such a manner.

[18] By paragraph 51 of the counterclaim, they alleged that they were "ready and willing to repay to [the first plaintiff] the amount lent under the [LFA] together with interest thereon and any costs or expenses it has incurred".

[19] For present purposes it is necessary to consider only the case which was based upon ss 52 and 87 of the TPA because the alternative cases added little to the ambit of the factual controversy and to the overall costs. For this costs application, the plaintiffs argued that this case was bound to fail, both upon the facts and the law. That argument occupied some 20 pages of written submissions and most of a day of hearing. On this application the plaintiffs sought to rely upon affidavits and exhibits totalling in excess of 3,000 pages and they referred to the trial bundle, which comprised 37 volumes, in several respects. All of this was in an attempt to persuade the Court, within one day of hearing, as to the merits of a case which had been set down for trial over 10 days of hearing. There was no oral evidence on this application.

[20] As this argument was developed, it sometimes gave the impression of an application for summary judgment. As it happens, the plaintiffs had applied for summary judgment shortly after the commencement of these proceedings. When the second, third and fifth defendants filed an amended defence and counterclaim on 16 August 2011, raising their claim under s 87, the plaintiffs did not pursue that application for summary judgment but asked for it to be adjourned to a date to be fixed and for directions for the preparation of the case for trial. At no time did they seek to relist their application for summary judgment. Nor did they apply at any stage to strike out all or part of the pleading of these defendants.

[21] At other times during the submissions for the plaintiffs on the present application, the argument resembled one which would be expected at the end of an extensive factual inquiry. There were many submissions which were to the effect that the defendants' pleaded case could not have prevailed against the effect of contemporaneous documents. Many of those points might have been forceful in the context of a consideration of the oral testimony of, for example, Mr McDonald, at the conclusion of the trial. But that was not the present context.

[22] According to the plaintiff's written submissions, there were said to be eight reasons why it was "wholly unreasonable" for these defendants to have defended the case upon the basis of a contravention of s 52.

[23] First it was said that the case was inconsistent with that which was argued by the present third defendant in another proceeding. That was an application for the winding up of the first defendant, on the just and equitable ground, in April 2011. It would appear that on that occasion, counsel for the present third defendant had argued that it was necessary to wind up the first defendant, to avoid a deadlock within its board which the present third defendant was suggesting, was unduly preventing the completion of the LFA by the issue of shares in the first defendant to the plaintiffs. That is an example of a point which would have provided a good basis for challenging Mr McDonald's evidence, had this case been tried. But in the absence of his evidence and other evidence which might have been called in the defendants' case, it cannot be concluded upon this basis that the s 52 case was groundless.

[24] Secondly, reliance was placed upon the fact that the allegations of s 52 misconduct were made only "in the face of an application by the plaintiffs for summary judgment", the amended defence being delivered on the eve of that application and some two months after the claim was filed. But that timing hardly provides a basis for concluding that the s 52 case was groundless.

[25] Thirdly, it was said that the defendants maintained their defence inconsistently with uncontroverted facts. The first of these was that the negotiations were conducted at arms length between sophisticated commercial persons with legal representation. A contravention of s 52 in such a context, however, would not be unprecedented. It was said that it was uncontroverted that Mr McDonald knew that the timing of the commencement of production from MDL162 was linked to obtaining allocation for port facilities in stage 2 of the Wiggins Island export terminal (WICET). The argument referred to a summary of the proposed evidence of Mr McDonald, with the suggestion that the summary showed that Mr McDonald's evidence would have been that from a press release he knew that stage 2 of WICET "would be completed for shipments in 2015 or 2016". That argument, however, misstates the effect of the proposed evidence of Mr McDonald. In the summary of his evidence, it was said that Mr McDonald understood that press release to refer to financial years, not calendar years. Therefore, a completion of stage 2 in the financial year 2014-2015 would not have been so inconsistent with the defendants' case. The plaintiffs also relied upon a press release of 22 March 2011, which was to the effect that stage 2 of WICET would not be completed until 2015 for part of stage 2 and 2016 for the other part. This was a public document and so it was said that it would have disproved Mr McDonald's case. Again, that would have been an apparently useful line for challenging his evidence. But it is another thing to say that it must have had the result of destroying it.

[26] The defendants' case was that the JT Boyd Report and the Nomura Model were the only relevant assessments available to the first plaintiff. It was argued by the plaintiffs that this was inconsistent with relevant facts known to Mr McDonald, which were that between 19 and 23 August 2010, the first plaintiff was undertaking a due diligence with the assistance of an external consultant who was reviewing the JT Boyd Report and geological data. The proposed evidence of Mr McDonald was that he knew of the engagement of this consultant and in fact spoke to him. But that would not have contradicted necessarily the case that the only assessments available to the plaintiffs were the JT Boyd Report and the Nomura Model. In other words, this consultant was reviewing those assessments without producing his own modelling, on one view.

[27] Another of these supposedly uncontroverted facts was an announcement to the ASX on 24 August 2010, in which the first plaintiff said to the market things which were inconsistent with MDL162 being used to produce only semi-hard coking coal and with coal production commencing at a time as assumed in the Nomura Model.

[28] Upon this combination of so-called uncontroverted facts, the plaintiffs submitted that Mr McDonald could not have been led into error to think that the royalty stream would commence from 2014, production would commence by 2014 or shortly thereafter or that the mine would be developed conformably with the Nomura Model. Again however, those facts would have had to be considered with other evidence at the trial, including the foreshadowed evidence of Mr McDonald of his conversations with relevant representatives of the plaintiffs. Those facts do not now establish a falsity of the suggested factual basis of the defendants' case.

[29] The fourth submission was that the defendants' case was inconsistent with contemporaneous documents. The first point sought to be made here was that the JT Boyd Report and the Nomura Model were at a "high level" and were preliminary in nature. From this it was said that it was "improbable that an officer or employee of Macarthur ... would raise funds through an issue of shares and commit $360 million to purchase the interest in MDL162 and commit to expenditure to the development of MDL162 ... without any pre-feasibility or bankable feasibility studies being undertaken". It was said that it is improbable that Mr McDonald or his company the third defendant could have been led into any error in thinking that the first plaintiff would do so. Again, that may have been persuasive at the trial but it does not prove here the falsity of the defendants' case.

[30] It was said that none of the contemporaneous documents refers to any representation being made by the first plaintiff as was pleaded. Accepting that to be so, the case was pleaded as representations made orally on behalf of the first plaintiff. Then the plaintiffs' argument referred to exchanges of emails between Mr Crawford (the sixth defendant) and a representative of the first plaintiff, which show Mr Crawford's role in the negotiations. The emails were copied to, amongst others Mr McDonald and his lawyers and in some cases Mr McDonald responded to them. The emails are said to be unsupportive of the defendants' case. That may be accepted. But again, it cannot be concluded now that they would have destroyed that case.

[31] It was said that the various documents signed by the parties, including the LFA, made no reference to the timing of the commencement of the development or production or to a payment of a royalty and nor did they refer to the JT Boyd Report and the Nomura Model. That would have been a relevant submission at the end of the trial. It was argued that an absence of a reference to any of these things made the defendants' case incredible, having regard to the fact that Mr McDonald was an experienced business person and with legal representation. But again, it is not unknown for a s 52 case to prevail against the terms of a contract, even where that contract contains a "no representation" clause.

[32] Particular reference was made to a provision in the document entitled Shareholders Agreement, which provided a means for the minority shareholders, the third and fourth defendants, to exercise a put option to dispose of their shares where a decision to mine had not been made by the board of the first defendant within four years of the commencement of the agreement. That was said to be inconsistent with "a decision [having] already been made to mine commencing 2014 conformably with the Nomura Model". But that does not now disprove the alleged representations which were pleaded by the defendants.

[33] Similarly, reliance was placed upon a document signed on 31 August 2010, described as a Royalty Deed, between the second defendant and a company described as Pegasus Royalties. Under that deed, there was an obligation on the second defendant to pay a royalty which was conditional upon its making a decision to mine and other things occurring in relation to the development MDL162. This was said to be contrary to the alleged representation "that a decision had already been made". There is an apparent tension in that way, but again, it is not evidence which now destroys the defendants' case.

[34] Another submission was that the pleaded case was inconsistent with the first plaintiff's contemporaneous board papers. It was said that if the defendants' case was true, it would follow that the relevant officer of the first plaintiff had misled her own board of directors. But that hardly provides a basis for contradicting the defendants' evidence. Part of the defendants' case was that the first plaintiff did not intend to proceed as it had represented to the defendants. The fact that the same misrepresentation was not made by that officer to her board was not inconsistent with the defendants' case.

[35] The plaintiffs' fifth submission was to the effect that there was no prospect of these defendants persuading the Court to refuse specific performance, as there was no ability on their part to repay the first plaintiff the sum of $360 million. However, in an affidavit sworn by Mr McDonald on 2 February 2012, he said that MDL162 was and is worth far more than $360 million and that he would have had no difficulty obtaining finance or another joint venture partner to enable the repayment of $360 million. He referred to three potential financiers or joint venture partners. He was not cross-examined on that affidavit or otherwise. The factual basis for this fifth submission is not established.

[36] The sixth submission related to the "sham" allegation, to which I will return.

[37] The seventh submission referred to the position of the sixth and seventh defendants, who wanted the shares to be issued and did not resist the proceedings. They constituted two of the three directors of the first defendant. Neither alleged that he had been misled by the first plaintiff and it was said that their evidence at the trial would have been that they were not misled. From this it was said that it was "wholly unreasonable" for Mr McDonald "not to have approached his co-directors ... to obtain a statement of the facts, especially where Crawford negotiated the outcome for McDonald's interests". But Mr McDonald's case was based upon alleged conversations to which he was a party. The fact that his case would not have been supported by the other directors did not make it hopeless.

[38] The eighth submission was that "the case on reliance and damage was hopeless". It was said that it was bound to fail on the facts because of evidence that on the defendants' side of the transaction, the only prospect of completing the purchase of MDL162 was to make an agreement with the first plaintiff. However, according to the summaries of evidence to be given by Mr McDonald, he was to say otherwise. In one of those summaries there was foreshadowed evidence that his side would have "abandoned the negotiation with Macarthur and instead proceeded with the proposal put by Xstrata Coal", a proposal which his summary of evidence detailed. Again, this is a factual question which would have been decided at the trial by a consideration of all of the evidence, including of Mr McDonald's oral evidence.

[39] The plaintiffs also submitted that neither the third nor fifth defendants could establish a loss to it or him in consequence of the completion of this transaction with the plaintiffs. That may be so, but the position of the second defendant was different. Its case was that it was worse off as a result of the transaction because its mine would not be developed expeditiously or properly operated. The likelihood of loss and damage to it might have been sufficient to obtain relief under s 87, with the effect of providing all three defendants with a defence.

[40] It was said that the so-called reliance case was bound to fail because nothing was pleaded by these defendants which was to the effect that they would have acted in some other way, and in particular pursued some other transaction, if the alleged conduct of the first plaintiff had not occurred. The plaintiffs submitted that the pleaded case was bound to fail. It was not pleaded as a "no transaction" case, ie that the defendants would not have entered into the LFA had the misconduct not occurred. Rather, they suggested, it was pleaded as a case for loss of expected profits from a development of the mine as was allegedly represented. This criticism of the pleading was well founded. The case about an alternative transaction with Xstrata, to which I have just referred, was one which should have been pleaded. As already noted, there was no application at any stage to strike out the pleading or any part of it. The pleading was deficient but the defendants' case in this respect was sufficiently revealed by the witness summaries. It cannot be said now that it was bound to fail.

[41] I return to the plaintiffs' complaint of the allegation of a sham. As the plaintiffs contend, this was a serious assertion of impropriety on the part of the plaintiffs and, in particular, the individual named in the pleading as the person who provided this model on their behalf. It was said that there was never a factual basis for making this allegation against the plaintiffs or this individual. It was also said that the allegation should at least have been withdrawn when the plaintiffs' summaries had been provided and relevant documents had been disclosed.

[42] The present question is whether it is demonstrated that this sham allegation was made without any basis. The apparent factual foundation for that allegation is indicated by a summary of the proposed evidence of Mr Doon, the Resource Manager of the MCG group of companies, to whom the plaintiffs' model was alleged to have been given. According to that summary, there was no justification for the revised assumptions made as to coal reserves and prices within that model. And also according to that summary, the application of this model would result in the net present value of MDL162 being a very large negative figure. Therefore I am unpersuaded that this allegation was made without any factual basis.

[43] As should appear from these reasons, the present application made extensive reference to much of the documentary evidence which would have been considered at the trial. In many respects that evidence, especially when considered in combination, would provide good grounds for suspecting that the defendants' case would have failed entirely. But to now make a fair finding that it would have failed, the court would have to consider all of the evidence which would have been available at the trial and, most importantly, the oral testimony which was to have been given in the defendants' case.

[44] The present position is not as if no witness summary had been provided by the defendants, thereby indicating that they could or would adduce no evidence. Nor is it the case that the witness summaries which were provided by the defendants admitted a falsity in their own case.

[45] A determination of the merits here would not only be unfair, given the limited factual inquiry which occurred within the hearing of the present application, but also it would offend the established principle that a court should not try a hypothetical action between the parties in order to determine a question of costs. In Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Lai Qin, McHugh J said:[1]

"In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extracurial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action."

[46] Rather than pursuing their summary judgment application or applying for some other summary relief such as the striking out of the defendants' pleading, the plaintiffs chose to incur no doubt very large costs in preparing for the trial of this case. Yet the plaintiffs want all of those costs on the indemnity basis, because they now say that there was no case which required a trial. In saying that, they did not suggest that there was some late disclosure of a critical fact or that for some other reason, their failure to pursue their application for summary judgment can be explained.

[47] Accordingly, the application for indemnity costs fails. It will be ordered that the third and fifth defendants pay to the plaintiffs their costs of the claim and of the counterclaim, including reserved costs, to be assessed on the standard basis.

[1] [1997] HCA 6; (1997) 186 CLR 622 at 624.